NEW YORK, Sept 16 ― The end of the Federal Reserve's rate hiking cycle has generally been a good time to own US stocks, but an uncertain economic outlook and stretched valuations could dampen upside this time around.
Investors with a more bearish view, however, say it is only a matter of time before higher rates tighten economic conditions and bring a downturn. The S&P 500 is already up over 16 per cent this year, aided in part by a US economy that has stayed resilient in the face of higher interest rates. Though most investors believe a recession is unlikely in 2023, a slowdown next year remains a possibility for some market participants. One worrying recession signal has been the inverted Treasury yield curve, a market phenomenon that has preceded past downturns.
More of the kind of generally benign inflation data that has come over the last few months, however, could mean the Fed's quarter-point increase in July was the last in a cycle that shook asset prices last year. Investors are pricing in a small chance of a cut as early as the Fed's January meeting, with expectations of a cut at about 35 per cent for May, according to the CME data.Analysts at Oxford Economics forecast further downside for global earnings, noting that stocks “have typically delivered far weaker returns following the final Fed rate hike when it has coincided with an EPS downturn.”