A Fed rate cut could actually mean bad news for stocks, analyst says

U.S. Federal Reserve Board Chairman Jerome Powell speaks at a news conference at the headquarters of the Federal Reserve on December 13, 2023 in Washington, DC. The Federal Reserve announced today that interest rates will remain unchanged.Win McNamee/Getty Images

  • A Fed rate cut usually signals something bad happening, Bespoke’s Paul Hickey told CNBC.

  • But the stock market rally doesn’t really need the Fed to cut rates in order to keep climbing.

  • Instead, it is primarly being driven by AI mania, he said.

All eyes are on the Federal Reserve to cut rates this year, but it might not be the market pick-me-up investors are rooting for, Bespoke co-founder Paul Hickey said on Tuesday.

“Be careful what you wish for,” he told CNBC, adding: “They cut rates for a reason, as we’ve talked about in the past, and they usually don’t cut rates because things are going great.”

While some analysts look forward to a Fed pivot as proof of soft landing success — where both inflation and unemployment are tamed without sparking a recession — others warn that interest rate cuts more likely mean a considerable economic slowdown.

That may be hard to hear for investors, as markets have spent months deciphering Fedspeak for clues as to when the first rate cut will happen. Many are eager to see central bank hawkishness end, and expect stocks to then surge higher.

But the Fed might not actually need to cut for equities to keep notching new records, Hickey said.

Three months into this year, major US indices are still on a streak of all-time highs, with the S&P 500 expected to reach as high as 5,500.

And according to Hickey, little of this has to do with the Fed, even if the market narrative often spotlights central bank activity.

“Last week’s Fed meeting put the nail in the coffin on a rate cut, and the market had its best week of the year,” he said. “So you gotta take a step back and think to yourself: ‘Ok, what is this market rallying on it, because it’s certainly not rate cuts.’”

To Hickey, most of the performance is instead driven by artificial intelligence, citing that the rally really began with ChatGPT’s announcement in late 2022.

Instead of the potential no rate cut scenario, a bigger risk to the stock rally will be earnings, Hickey added, noting the stock’s reaction during last week’s earnings reporting.

Read the original article on Business Insider