Some stay bullish on stocks even without rate cuts

Cite strength of US economy

Robust global economic growth may offer equities enough support to resume a record-breaking rally, even if bets on Federal Reserve interest rate cuts this year are abandoned.

After the best week for the S&P 500 Index since November pushed the US stock gauge back toward its record levels of March, investors are faced with a call on whether the weakness seen earlier this month was only a blip or if delayed policy easing will pull the market down again.

The answer, some investors say, lies in the market playbook of the 1990s, when equities more than tripled in value despite years of rates that were hovering around current levels. Back then, robust economic growth provided the platform for stocks to shine, and while the global outlook is more uncertain at this point in time, there still exists enough momentum to push the stock market forward.

“You have to assess why you could be in a scenario where there’s fewer rate cuts this year,” Zehrid Osmani, a Martin Currie fund manager, said in an interview. “If it’s related to an economy being healthier than expected, that could support the rally in equity markets after the typical volatile knee-jerk reactions.”

Prior to the gains of this past week, equities had been taking a breather throughout April after initial expectations of policy easing kick-started record-breaking rallies in US and European equity markets during the final months of 2023.

Traders’ anticipation of at least six 25 basis-point Fed cuts this year at the beginning of January has been pared back to only one as US inflation remains elevated, prompting concerns that prolonged restrictive policy would weigh on the economy.

Rising geopolitical risks and uncertainty over the outcome of global elections have also caused volatility to spike, driving demand for hedges that would offer protection in case the market sees a sharper rout.

Still, confidence in the global economy has strengthened this year, backed mainly by US growth and recent signs of a rebound in China. Similarly, the International Monetary Fund this month raised its forecast for global economic expansion while a Bloomberg survey shows that euro zone growth is expected to pick up from 2025.

While recent economic data reflected a sharp downshift in US economic growth last quarter, these figures should be “taken with a grain of salt” as they disguise otherwise resilient demand, said David Mazza, chief executive at Roundhill Investments.