Wall Street Braces for Potential Market Shift as Fed Mulls Rate Cut

The S&P 500 has been flirting with record highs, but market analysts are cautioning that the rally may be short-lived. With the Federal Reserve's upcoming policy decision looming, traders are eagerly awaiting the central bank's next move, which could have significant implications for the broader market.

Navigating the Uncertain Terrain Ahead

The S&P 500's Precarious Position

The S&P 500 has entered the week less than 1% below its record high last reached in July, marking a remarkable recovery from the market's earlier volatility. This comes on the heels of the benchmark's best weekly performance since November, with a 4% surge. However, some analysts are warning that this momentum may not be sustainable.Jonathan Krinsky of BTIG, the firm's chief market technician, believes that a move to new highs could be short-lived. He cites the recent run-up in the market leading up to the upcoming Federal Open Market Committee (FOMC) meeting, where the Fed is expected to cut rates by at least a quarter-percentage point. Krinsky suggests that the anticipation of a potential 50-basis-point rate cut could set the stage for a "false breakout" after the decision.

Diverging Expectations and Potential Headwinds

Expectations for a larger, half-percentage-point rate cut have been on the rise, with the CME Group's FedWatch tool showing traders pricing in a 63% chance of such a move. However, Krinsky cautions that this widely anticipated outcome could lead to a "news failure," where the market's reaction may not align with the expectations.Furthermore, Krinsky points to more seasonal headwinds ahead, noting that while September started off rocky, it has bounced back in recent weeks, leaving the month essentially flat so far. He highlights that the typical seasonal weakness often runs from mid-September through early October, meaning the market is entering that window this week.

Cautious Optimism from Wall Street Analysts

Krinsky is not the only one on Wall Street treading carefully with the S&P 500 near record highs. Lori Calvasina, the head of global equity research at RBC Capital Markets, has maintained a neutral stance on the S&P 500, even as the index approaches the firm's year-end 2024 price target.Calvasina cites concerns about investor sentiment, noting that U.S. equity futures positioning continues to look "even more concerning, after hitting yet another, new, all-time high." However, she also acknowledges that the recent sharp move lower in 10-year yields has started to improve the earnings yield gap for the S&P 500, which could be a more favorable development for stocks.

Antitrust Worries Weigh on Tech Giants

Elsewhere on Wall Street, Evercore ISI has cut its price target on Alphabet by 11%, to $200 from $225, citing antitrust worries. Analyst Mark Mahaney believes that the "probable medium-term uncertainty over the DOJ antitrust trials and their likely remedies will limit the potential for any near- or medium-term material re-rating" of the tech giant's stock.Mahaney suggests that a "worst-case scenario" is more likely than the market currently assumes, underscoring the potential challenges facing the tech sector as regulatory scrutiny intensifies.