Wall Street braces for possible stock rally despite expected Fed rate hike
Investors are pricing a near-certain 25-basis-point Fed rate increase this week, but some analysts say the move could lift equities as it may calm bond-market pressures.
Wall Street is pricing a 90% chance that the Federal Reserve will raise its benchmark rate by a quarter point to between 3.75% and 4.00% at Wednesday’s policy meeting, according to the CME FedWatch Tool. The market is also seeing higher odds of additional hikes in October and December.
Despite the usual expectation that higher rates depress stocks, major indexes rose on Friday, reflecting a shift in trader focus toward the bond market. "It's the signaling impact and the net impact on the long end of the curve that would end up being the positive thing for equity markets," said Scott Ladner, chief investment officer at Horizon.
Investors hope a rate increase will curb inflation and keep long-term Treasury yields from climbing further. The 10-year Treasury yield reached 5% on Monday, a level not seen since 2023, which had previously weighed on equities.
Analysts note that the market’s reaction may depend on the tone of Fed Chair Kevin Warsh’s remarks at the upcoming press conference. A firm stance on inflation could reinforce expectations of further hikes, while a more dovish tone might push longer-dated yields higher. Bank of America Securities strategist Mark Cabana said a hawkish briefing could lift two-year yields by 5-10 basis points and lower 30-year yields by the same amount, whereas a dovish outlook could produce the opposite effect.
Historical data shows that the start of a tightening cycle typically drags the S&P 500, which fell an average of 3.4% in the month following the first hike of the past six cycles, according to Canaccord Genuity. However, JPMorgan’s Mislav Matejka argued that much of the bond-market repricing has already occurred, potentially clearing a path for equity gains through the end of the year.
"Much of the repricing has reflected the rebuilding of a previously compressed term premium, not a signal that inflation is about to spiral," Matejka wrote. "The marginal upside pressure from this channel should therefore diminish."