Has the market priced a Fed put that’s not even coming?

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Michael Wilson at Morgan Stanley. There is a Fed pivot coming in my view as inflation falls relatively quickly. But it’s coming because so is the global recession led by China and Europe but also landing in the US. Earnings are going to fall a lot further yet and that is not priced.

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The magnitude of this bear market rally has surprised many, including us. In our view, it’s been driven by a combination of better than feared 2Q earnings (although revisions/price came down into the quarter), light positioning and continued hope for a less hawkish Fed path. In our experience, the last catalyst is historically the one capable of driving significant late cycle rallies even amid deteriorating fundamentals. The most recent example of this occurred in 2019 when a durable pause in the Fed Funds Rate and then a series of cuts amid a still tight labor market catalyzed a ~40% rally in the S&P 500. This rebound came despite a severe negative earnings revisions
cycle and significant margin headwinds. Late-cycle earnings growth headwinds were apparent and our leading earnings model pointed to negative growth 12 months out (like it does today),yet equities brushed off fundamental risks,and the market multiple expanded some 5 turns.

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About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.