Interview, Fireside Chat
Can Stocks Rally With a Hawkish Fed?
- Federal Reserve hiking cycles are expected to conclude with two total rate hikes, contrasting with market pricing that assumes four to six hikes, with a likelihood of two or three hikes identified as the base case.
- Oil prices, currently trading above $100, are viewed as a primary determinant of inflation; a subsequent fall in oil prices is anticipated to provide necessary market comfort, lower bond yields, and catalyze a return to fixed income markets.
- Real financing pressures and capital competition are projected to keep yields elevated for the next six to 12 months, driven by an AI investment boom, rising corporate finance needs, and fiscal deficits, though a meaningful repricing lower could occur if the AI boom turns or growth faces a downside surprise.
- The stock market is forecast to sustain approximately 2% growth, characterized as a "pretty decent" outlook despite potential headwinds and trickier conditions expected over the next quarter or two.
- A "bullish factor" for fixed income and an "all assets up" trade are contingent on falling oil prices and the U.S. passing midterms, with expectations that less worry regarding ongoing tightening will emerge by the end of the year.
- Market participants believe the balance of risks regarding rate hikes favors fewer increases, with the current pricing of hikes for the Fed, ECB, Japan, and Canada creating paths for relief from the current elevated levels.
- The U.S. economy is expected to maintain strength supported by a big CapEx cycle and solid earnings, potentially leading to a "strong US economy" narrative that supports the U.S. dollar, provided financial conditions do not tighten beyond current levels.
- Long-term valuations are considered attractive compared to previous periods, with the potential for yields to reverse from current highs if inflation relief occurs or financing dynamics shift, although a significant drop in yields outside of inflation risk remains difficult to anticipate.
- The distribution of economic outcomes includes various possibilities in both directions, though the anchor point for the Federal Reserve remains at two rate hikes.