Why stocks could enter a 10% correction after getting rate-cut wish
Add Axios as your preferred source to
see more of our stories on Google.
Illustration: Sarah Grillo/Axios
Wall Street got its wish with the first rate cut of 2025, but the Federal Reserve's mixed signals about the health of the economy could put near-term pressure on stocks, potentially triggering a correction.
Why it matters: With few if any near-term catalysts like earnings or an upcoming Fed meeting to focus on, investors may finally find themselves confronting market risks they've ignored for months.
What they're saying: "Fourth quarter, you're really sort of raising the likelihood of that 10% pullback in the S&P," says Trevor Slaven, global head of asset allocation at Barings.
- Price leads narrative on Wall Street.
- Any mild downward pressure in stock prices that happens at a time when the market is lacking big news drivers could force investors to look around and focus on the lurking risks.
- "That's when the narrative shifts," he says, and a 3% downturn becomes a 10% correction.
Zoom in: What could this look like in practice?
- Slaven says it could be as simple as a Big Tech firm pointing to increased productivity because of AI.
- That could reignite investor fears about AI replacing jobs and subsequent economic weakness.
- That's when people could get defensive and think "How are we not talking about all these downside risks?"
Catch up quick: More volatility might lie ahead given the narrative roulette that is also playing out at the Fed.
- On Wednesday, the central bank raised its growth projections, kept its unemployment estimate steady and still cut rates. That's atypical.
- "I have not seen a meeting with so much contradictions," Anna Wong, chief economist at Bloomberg Intelligence, wrote on X.
Yes, but: Any downturn would be a buying opportunity, and stocks will still be higher six to nine months from now, he says.
- Retail investors have been furious buyers of the dip so far this year, staying invested even amid April's volatility.
- If novice traders buy into weakness, that could put a floor under the market this fall.
What we're watching: Employment is likely to be the key driver for the Fed's next moves.
- That's why investors will be poring over any insights into the health of the job market.
Thought bubble: Watch for how investors hedge to get an indication of how many traders are concerned about a correction.
