The probability of a 50 basis points (bps) rate cut at the upcoming Federal Open Market Committee (FOMC) meeting soared to around 50% after Friday’s market closure, a significant rise from earlier in the week when the likelihood was just ~12%.
While a 50bps rate cut could offer a short-term uplift to equities, BTIG strategists project that the S&P 500 could ascend to new all-time highs above 5700 this week, regardless of the rate decision.
“A move to the upper boundary of the rising trend channel would be ~5800, although we don’t expect it to reach that level before potentially experiencing some pullback into early October,” BTIG strategists mentioned in a Sunday note.
However, they warn that Wednesday’s announcement could set the stage for a "false breakout."
"For instance, the S&P 500 is coming off its best week of the year. While this follows its worst week, there was still substantial buying in the days leading up to the decision,” strategists explained. "Often, this environment can trigger a 'sell the news' reaction."
They also highlighted that momentum is likely to exhibit negative divergence compared to the highs observed in July.
Despite early-month volatility, the S&P 500 is essentially flat month-to-date. BTIG notes that the latter half of September through early October is historically weak in terms of seasonality.
This aligns with the potential for a false breakout, which could present an opportunity for buyable weakness in October, just before the U.S. Presidential election.
The investment banking firm drew comparisons to September 2007, when the Fed began its rate-cutting cycle, but emphasized a significant difference: credit spreads had already been widening for six months back then. Currently, spreads are relatively stable, suggesting that further deterioration would be required for a more direct comparison.
Meanwhile, BTIG observes the potential for small-caps to break out of their current range, an outlook they had been advocating for last week. However, the sustainability of such a breakout remains uncertain.
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**SEO Optimized Title:**
"FOMC Rate Cut Could Propel S&P 500 to New Highs: Key Insights and Market Analysis"
**Analysis and Breakdown:**
Alright, let’s break this down into bite-sized pieces so that everyone can understand how this could impact your life and finances:
1. **What’s Happening?**
- There's a 50% chance that the Federal Reserve (the Fed) will cut interest rates by 0.5% (50 basis points) at their upcoming meeting. This is a big jump from earlier in the week when the probability was only about 12%.
2. **Why Does It Matter?**
- Interest rate cuts can make borrowing cheaper, which often stimulates economic activity and can provide a boost to the stock market. Lower rates can also make bonds less attractive compared to stocks, pushing more money into the stock market.
3. **Impact on S&P 500:**
- BTIG, a financial analysis firm, believes that the S&P 500 (a stock market index) could reach new all-time highs above 5700 points this week, even if the Fed doesn’t cut rates.
4. **Potential Risks:**
- Despite the optimism, there are warnings about a "false breakout." This means the market might initially rise after the announcement but then fall sharply. This often happens when there’s a lot of buying before the news, leading to a "sell the news" reaction once the actual event occurs.
5. **Market Behavior:**
- The S&P 500 is flat for the month so far, and historically, the end of September to early October is a weak period for stocks. This could mean we might see a dip, presenting a buying opportunity in October, ahead of the U.S. Presidential election.
6. **Historical Context:**
- In 2007, when the Fed started cutting rates, there were already signs of financial stress (widening credit spreads). Now, the situation is different as credit spreads are stable, meaning the financial environment isn't as strained.
7. **Small-Caps:**
- There's also potential for smaller companies (small-caps) to break out of their current price ranges, though it's uncertain if this will last.
**Bottom Line:**
If the Fed cuts rates, it could boost the stock market in the short term. However, be cautious of a potential "false breakout" where the market might drop after an initial rise. Keep an eye on market trends and consider potential buying opportunities in October. This is particularly relevant if you’re investing or considering entering the market.