Lori Calvasina on Market Focus: Fed Cuts vs. Inflation and Seasonality

Market Focus on Fed Cuts

• 🎯 Markets are currently prioritizing Federal Reserve rate cuts over potentially concerning macroeconomic data, a sentiment that has persisted for months.
• 💡 While inflation pressures are building, they are not yet considered out of hand, allowing markets to look past some negative economic indicators.

Inflation and Equity Multiples

• 📈 Historically, rising inflation tends to decrease PE multiples, which is currently observed as the S&P 500 struggles to break through new highs.
• 📊 Conversely, there's also a trend where higher inflation correlates with increased household equity allocations, creating conflicting impulses in the market.
• 🧠 The market is currently leaning towards the positive tailwinds, managing to overlook some of the headwinds.

Concerns About Seasonality and Valuations

• ⚠️ Despite current market optimism, there are lingering worries about negative seasonality typically seen in September and October.
• 📉 The market's ascent to current highs may have been predicated on the assumption of no significant ripple effects from earlier policy disruptions.
• 💡 A key insight suggests the market wants Fed cuts but doesn't necessarily need them, a sentiment that is now shifting as cuts appear more necessary.

Fed Cut Expectations and Valuations

• 💰 Investors are debating the potential terminal rate for next year and have likely pulled forward the expected pace and launch point of the next cutting cycle.
• 🗓️ While cuts were factored into longer-term outlooks (late 2025 and 2026), the current pace of expected cuts is a positive development.
• 🧐 However, at current peak valuation levels, there's a significant question of whether much of this positive news is already baked into stock prices.