The stock market’s continued climb to new heights despite the Federal Reserve’s reluctance to cut interest rates has raised concerns among analysts at JPMorgan. In a recent research note, JPMorgan highlighted the growing gap between soaring stock prices and the Fed’s pushback on rate cuts, warning investors to be wary of the disconnect.
Since last October’s market downturn, stocks have surged by 30%, largely driven by expectations of an interest rate cut in March. However, these expectations have been pushed back significantly, with the market now pricing in an 80-basis-point rate cut, down from the peak of 180 bps in January.
Analysts at JPMorgan cautioned that equities may be ignoring the latest shift in rate cut expectations, emphasizing the need for corporate earnings to accelerate to bridge the gap. They also noted that bond yields are expected to decline in the second half of the year, but rising inflation swaps could delay a rate cut further.
The tech-driven rally in the S&P 500 has been fueled by AI stocks, but the recent uptick in inflation has prompted the Fed to delay rate cut expectations from March to June. Despite this, analysts are skeptical of a June rate cut due to the latest inflation data.
JPMorgan’s team also highlighted the market’s complacency towards downside risks, with recession odds underestimated and potential overallocation in cyclicals and defensives. They warned that the market may not react as positively to falling bond yields in the future, reverting to a more traditional correlation between yields and equities.
Overall, JPMorgan’s analysis suggests that investors should be cautious of the growing gap between soaring stocks and the Fed’s reluctance to cut interest rates, as it could have implications for earnings projections and market performance in the future.
