A Less Dovish Fed Surprises Investors
Watch for rotational action into secondary stocks after a poor response to Microsoft and Meta earnings.
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Much of the recent market uptrend has been driven by the conviction that the Fed is set to deliver a series of interest-rate cuts. The thinking behind this belief is that the slowing employment market is a greater threat to the economy than inflationary pressures. Market participants are also admitting that tariffs have not been the disaster that many thought they would be.
A dovish Fed, along with momentum in the AI sector and a higher level of speculation in smaller stocks, has delivered an exceptional rally beginning in March following a selloff on tariff concerns.
For a while now, the bears have been expressing their dismay with extended technical conditions and high valuations in certain areas of the market. Investors have ignored them, however, and turned the pessimists into fuel for more new highs.
On Wednesday, Fed Chair Jerome Powell threw a wrench into the machinery of the market with a comment that a rate cut in December was not a sure thing. Investors were not expecting this. Odds of a rate cut at the next meeting in December fell sharply. Hopes of a half-point cut have gone to zero, and chances of no rate at all are now a coin flip.
In addition to concerns about the Fed, both Microsoft (MSFT) and Meta (META) are seeing negative reactions to their earnings reports. A positive reaction to Google (GOOGL) is offsetting some of the pressure, but the Magnificent Seven is indicated lower by 0.8% after hitting a new all-time high.
With the indexes extended, this negative news flow is an invitation to lock in some gains, but the most important issue will be the extent of underlying support. There is a big supply of folks who have not chased recent strength, and they are anxious to buy pullbacks at support levels.
While the indexes are extended, many individual stocks are not and are still good values. Investors will likely be looking to rotate into other areas of the market, especially with positive year-end seasonality starting to hit.
Market breadth and sector rotation will be the key areas to watch. There is good reason to take some profits in the leading technology names, but if there is a greater focus on stock picking rather than index action, there will be good opportunities for aggressive traders.
At the time of publication, Rev Shark had no positions in any securities mentioned.
