Does the market need another interest rate cut?
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Illustration: Brendan Lynch/Axios
The market rally stumbled after Federal Reserve chair Jerome Powell said the central bank is unsure about a third rate reduction in December. But we were in a bull market before lower interest rates came to the table.
- So why does Wall Street want more rate cuts so bad?
The big picture: AI has powered most of the rally. Lower rates could allow the rest of the market to catch up. That broadening would make for a less concentrated, and arguably healthier, bull market.
What they're saying: "I don't necessarily think that the market needs the Fed to cut, I think the economy would like the Fed to cut," Sam Zief, the global macro strategist for JPMorgan Private Bank, tells Axios.
- The market "barely registered" Powell's pushback against a guaranteed December rate cut, he notes. (The S&P 500 closed down less than 0.5% Wednesday.)
- In his remarks, Powell also indicated the AI trade isn't rate sensitive.
Follow the money: Look at the kinds of stocks that did move off the back of Powell's comments to see who could benefit from rate cuts.
- Cyclicals and small-cap companies slumped.
- This indicates investors want to see lower rates for companies tied to the economic cycle and those with significant debt on their balance sheets.
- The Magnificent 7 ETF, conversely, closed up on the day, fueling the idea that Big Tech stocks can keep rallying regardless of what the Fed does.
Reality check: The economy and AI are increasingly linked.
- If something threatens the AI trade, that could threaten the economy, given that AI capital expenditures grew at a faster clip than consumer spending in the latest GDP data.
- The Fed isn't focused on market concentration, but it cares if a downturn in dominant AI stocks tightens overall financial conditions, Zief says.
What to watch: The debt loads at AI companies.
- If Big Tech companies begin taking on more debt to fund their AI spending, they would benefit more directly from lower rates.
- But until that trend picks up, Big Tech stocks will keep on moving predominantly off earnings growth rather than interest rates.
