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50bp Cut Validates Our 6,000 S&P Index Target

CPI Print Validates Our Three 25bp Cut View

The Fed cut rates 50bp today and issued an SEP indicating two more 25bp cuts this year and another 100bp of cuts in 2025.  For the first time since the Pandemic, this Fed made an aggressive action to be ahead of the curve by cutting rates to ensure the economy does not slip into recession.  The Fed is dominated by labor economists and the recent normalization of the labor market and increase in the unemployment rate motivated the committee to cut aggressively.  The SEP was only 25 bp below expectations for this year and next, which indicates the Fed does not anticipate a recession that would require aggressive future rate cuts.  The stock and bond markets ticked up slightly, but the response was initially very muted as implied future cuts were not as aggressive as the initial 50bp cut would imply.

 

We are even more confident in our S&P target of 6,000 for the year as global rate cuts increase liquidity and drive global stock and bond markets higher.   We continue to expect interest rate-sensitive sectors such as banks and REITs to outperform tech and defensive sectors such as utilities and consumer staples.  The stock market may be relatively range-bound in September into October, as we are in a seasonally weak period for stocks and there is considerable uncertainty heading into the election.  This election is particularly important as the 2017 tax cuts need to be extended and Republicans are proposing a cut in the corporate tax rate to 15% with the Democrats are proposing to raise it to 28%.  The corporate tax rate has a dramatic impact on S&P earnings and the earnings growth rate.  Our target for the S&P in the case of a democratic sweep, assuming a 25% corporate tax rate, is 5,400 while a Republican sweep would raise our target to 6,700, assuming a 15% corporate tax rate.  Gambling markets indicate an 80% chance of divided government, 12% of a Republican sweep, and an 8% chance of a Democratic sweep.

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