Stocks Poised for Sustained Rally as Fed Prepares to Cut Rates

The stock market is on the verge of a multi-week rally after a major Federal Reserve decision on interest rates is expected to be announced on Wednesday, according to Fundstrat's head of research, Tom Lee. The prominent stock market strategist pointed to the Fed's upcoming policy meeting, where central bankers are set to convene and discuss their next interest rate move.

Bullish Signals Ahead of the Fed's Decision

Anticipation of a Rate Cut

Markets are widely anticipating the Fed to issue a 25 or 50 basis point rate cut – the first from the central bank in over four years. This move is expected to provide a boost to the stock market, as investors have been eagerly awaiting the Fed's decision. The potential rate cut comes at a time when the economy has shown some signs of weakness, with the job market slowing down and new hires dropping 3.7% from levels last year in July, according to the Bureau of Labor Statistics.

Supportive Economic Conditions

According to Lee, the current economic conditions are supportive of a rate cut, with the inflation data being favorable and the labor market needing some support. These factors, combined with the expectation of the Fed's decision, are likely to give the markets a boost of confidence, leading to a potential rally in the coming weeks.

Dovish Implications of the Rate Cut

Regardless of the size of the rate cut, whether it's 25 or 50 basis points, Lee believes that stocks will move higher, as long as the Fed Chair, Jerome Powell, conveys a message that more cuts are on the way. The strategist explained that a 25 or 50 basis point cut could have both hawkish and dovish implications, but the key is whether the Fed signals that this is the start of a cycle where they are confident in moving back towards a neutral policy stance.

Uncertainty Remains

While the outlook for the stock market appears positive in the near term, the recession outlook remains uncertain. New York Fed economists are currently pricing in a 62% chance that the economy could tip into a downturn by August of next year, up slightly from the odds priced in last month. Lee acknowledged that if the Fed's decision seems to be dragging on the members and there are concerns over a hard landing, the market could view anything as negative. However, he remains optimistic that the market will view the Fed's decision positively.

Positive Outlook for the Long Term

Looking beyond the immediate future, Lee is also predicting a strong 2025 for the stock market. The strategist believes that the volatility smoothing out after the presidential election should give stocks a runway for another strong year, especially as the Fed cuts rates and economic policies from both presidential candidates look to be constructive.In conclusion, the stock market is poised for a sustained rally in the coming weeks, driven by the anticipation of a Fed rate cut and the supportive economic conditions. While uncertainty remains, the overall outlook appears positive, with the potential for continued strength in the market over the next 12 months and beyond.