Who’s nostalgic for the halcyon days when we expected six rate cuts this year? I’ll assert that Mr. Market isn’t, since we’ve managed to rally consistently even as hopes for the timing and number of cuts dissipated. I had the privilege of discussing this topic during a television interview earlier this week (from this video’s 16:40 mark), and I though it would be useful to expand my thoughts in writing.
Considering that one of the key elements that ignited the current rally was a hope that the Federal Reserve would aggressively cut rates, it is counterintuitive to see stocks rallying even as those hopes diminish. We wrote in December that there appeared to be a conundrum in the market’s expectations. Earnings expectations were based upon a decent economy, but expectations for rate cuts priced in economic weakness alongside a victory over inflation.
The markets always seemed to be well ahead of the Federal Reserve regarding cuts. Ahead of the December FOMC meeting, when the Summary of Economic Projections, or “dot plot” indicated that the group’s median estimate was for three 25 basis point cuts this year, futures were already pricing in between four and five. After the meeting, traders seemed to think, “Great, we hear what you’re saying about three cuts, which is terrific, so we’ll anticipate six.”
On the day after that meeting there was an 89% probability of a rate cut in March. That’s currently 2%. Two full cuts, plus a 77% chance for a third were priced in for June. We now see an 84% chance for cuts to begin in June. The six cuts that were priced in for 2024 are now three. Generally solid economic reports and somewhat disappointing inflationary data have led to those diminished assumptions.
A steady stream of rhetoric from Fed talking heads also provided a dose of cold water. Those began shortly after the December meeting – something we noted on December 20th – but investors only began to listen in earnest somewhat recently.
So why the muted reaction to the changes. Solid earnings and economic reports have played a role, but neither have been overwhelmingly positive. Except of course for a few exceptions – and one highly notable one.
Yes, Nvidia (NVDA) and other key large-cap technology stocks are driving the bus. It’s hard to imagine them having a larger role on the market psyche than the Fed, but it seems to be the case. NVDA has managed a truly remarkable streak of beating consensus estimates, raising guidance, and then beating the raised guidance. That’s essentially impossible to fight, and it’s clear that traders have no stomach for attempting to fight it. In the graph at the bottom, note the relationship between the S&P 500 (SPX) and NVDA over the past 20 days, during which NVDA is up over 30%.
It’s NVDA’s market, and we’re all living in it. Rate cuts are taking a back seat to AI-based enthusiasm, and the earnings gusher that at least some stocks are offering.
20-Day Chart, NVDA (white) vs. SPX (yellow)
Source: Bloomberg
Past performance is not indicative of future results
Disclosure: Interactive Brokers
The analysis in this material is provided for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IBKR to buy, sell or hold such investments. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.
The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Interactive Brokers, its affiliates, or its employees.
