U.S. stocks could see a sharp selloff later this week if Federal Reserve Chairman Jerome Powell again pushes back against expectations that the central bank could cut interest rates later this year, according to a top U.S. equity strategist at Morgan Stanley.
A more “hawkish” message from Powell at Wednesday’s Fed meeting could trigger a “near-term negative surprise for equities” after two straight months of gains for the S&P 500, according to Michael Wilson, Morgan Stanley’s chief U.S. equity strategist and chief investment officer.Anything the Fed does to move the bond market to price in more rate hikes could also feed through to stocks by sending the main indexes lower, Wilson said.
Fed funds futures traders, however, expect the Fed to deliver multiple rate cuts before the end of 2023, following one final hike of 25 basis points this week. This disconnect represents a risk for stocks. “From our conversations, we’ve found investors are less focused on the upcoming Fed meeting as a potential risk event for equities. We believe that equities are priced for an optimistic policy outcome ,” Wilson said in a note to clients on Monday.