Weekly Market Update: June 24, 2024

The Federal Reserve remains on its “high for longer” interest-rate course. The Federal Open Market Committee (FOMC) kept the federal funds target rate steady at 5.25% to 5.50% during its June meeting, but also took a slightly more-hawkish stance on monetary policy. Specifically, the central bank reduced its outlook for interest-rate cuts in 2024 to just one, down from its March projection of three reductions. The Fed statement also showed that four senior voting members now see no interest-rate cuts this year.

Meanwhile, Wall Street has taken a more dovish position on near-term monetary policy. Such sentiment gained steam after the Labor Department reported weaker-than-expected May readings on consumer and producer (wholesale) prices, which may be an indication that inflation is easing. The Street now anticipates two rate reductions by year’s end, with the odds of a cut as early as the September FOMC meeting building. This consensus view was the primary reason why Treasury yields did not spike on the Fed’s June monetary policy prognostications and Chairman Powell’s remarks.

The health of the U.S. economy will likely determine the Fed’s monetary policy course during the second half of the year. To date, the economic data, which include a still-resilient labor market, have put minimal pressure on the central bank to reverse course short of achieving its goal of bringing price growth closer to its 2% target rate. With the possibility of a “soft landing” still in play, and absent certain parts of the economy coming under significant duress, particularly the consumer sector, the lead bank is likely to keep rates sufficiently restrictive in the near term. Accordingly, investors took the recent soft retail sales statistics in stride.

The next big event for Wall Street is second-quarter earnings season. There, analysts’ expectations for S&P 500 companies have risen, with the estimated growth rate for the Index now just shy of 10%. This would mark the biggest advance in more than two years and may be needed to justify the elevated price-to-earnings multiple for the S&P 500 Index.

Conclusion: With equity market valuations quite frothy, and the Fed still not ready to pivot on the monetary policy front, we think investors should target the stocks of high-quality companies with a track record of producing steady earnings and cash flow growth. 

Source: ValueLine.com