Wall Street Warns: Potential Stock Market Lull After Rate Cuts

Top Wall Street strategists suggest the recent record-breaking rally in the U.S. stock market risks a period of stagnation following the Federal Reserve's decision to cut interest rates this week.

Concerns over Economic Slowdown

Strategists from Morgan Stanley, JPMorgan Chase, and Oppenheimer Asset Management have issued warnings about a more cautious tone potentially replacing bullish sentiment, as investors shift their focus to a possible economic slowdown. The recent boost to the S&P 500, nearing all-time highs, was fueled by expectations of monetary policy easing from the Fed. However, there's growing concern that the anticipated 25-basis-point cut on Thursday may not be enough to address a weakening U.S. labor market.

Inflation and Tariff Impact

Investors are also still trying to gauge the impact of tariffs on inflation, which remains above the Fed's 2% target. Michael Wilson of Morgan Stanley comments, "The near-term risk is centered on the tension between lagging, weakening labor data and the Fed potentially not being able to deliver the market's 'need for substantial cuts'." Nevertheless, he still recommends buying the dips, with his most optimistic scenario seeing the S&P 500 rising 9% to 7,200 by mid-2026.

Morgan Stanley and JPMorgan Expectations

JPMorgan strategists indicate that while the stock market has shrugged off weak indicators and achieved multiple record highs, this trend could reverse once the Fed initiates its first rate cut for 2025. The JPMorgan team, led by Mislav Matejka, wrote, "Once easing restarts, equities are likely to become more cautious for a while and price in more of the downside risks, effectively a repricing of the current potentially complacent stance."

Divergent Views

These warnings contrast with the broader bullish sentiment towards the U.S. stock market. Driven by large tech stocks, the S&P 500 has risen 12% this year. A cohort of strategists, including Deutsche Bank and Barclays, have raised their year-end S&P 500 targets this month, citing strong corporate earnings and the buzz surrounding artificial intelligence.

Oppenheimer's Perspective

John Stoltzfus, chief investment strategist at Oppenheimer Asset Management, also suggests that as long as the fundamentals of the U.S. economy remain resilient, any sell-offs following a Fed rate cut are likely to be limited in size and duration. He wrote in a note, "Should the Fed choose, as the majority expect, to cut rates by just 25 basis points, the market may experience a sell-off after the news as prices have been traded to new highs in anticipation and expectation of this rate cut."

Additional Analysis

It's important to note that assessing risk in the stock market should take into account a wide range of factors, including historical performance, macroeconomic indicators, and geopolitical circumstances. Technical and fundamental analysis can help investors make informed decisions about their portfolios. Investors should always conduct their own research or consult a financial advisor before making any investment decisions. Understanding market volatility, economic cycles, and industry trends is crucial for navigating the complexities of the stock market. Furthermore, diversification across different asset classes can help mitigate risk and improve long-term investment outcomes.