The US stock rally is seeking a Fed cut playbook

A$14-TRILLION RALLY that has taken stocks to record highs is heading for an inflection point this week, with investors expecting the US Federal Reserve to resume cutting inter- est rates at its long-awaited monetary policy meeting.

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‘The S&P 500 Index is up 32% from its April lows, buoyed by bets that the Fed will lower borrowing costs several times this year, and a 25-basis-point (bp) reduction on Wednesday is seen asa lock. Bullish traders may have history on their side: The index has been 15% higher, on average, a year after cuts resumed following a pause of six months or more, data from Ned Davis Research going back to the 1970s show. ‘That compares to.a12% gain in the same period after the first cut of an ordinary cycle.

The worry is whether the Fed has acted quickly enough to head off an economic hardlanding that would undercut the case for stocks to rise further. Though growth remains relatively strong and corporate profits are healthy, ominous signs have cropped up in recent data, including a jobs report that showed unemployment at its highest level since 2021. Investors are employing a range of strategies to take advantage of an expected shift, from buying shares of smaller companies to sticking with the mega-cap names that have led markets higher.

“We're in a unique moment,” said Sevasti Balafas, chief executive officer of GoalVest Advisory. “The big unknown for investors is how much is the economy slowing and by how much will the Fed need to cut rates. It’s tricky.”

With the Fed’s post-meeting statement set to be released at 2 p.m. on Wednesday, investors will look for changes in the latest quarterly rates projections, known as the dot plot, and pore over Fed Chair Jerome H. Powell’s remarks a half-hour later.

Swaps contracts are fully pricing in at least a quarter-point reduction, with policymakers expected to restart an easing cycle they halted in December. Roughly 150 bps of cuts are priced in over the next year. An outlook from the Fed echoing that view would be an encouraging sign for stock bulls, who have largely banked on a gradual easing path that keeps the economy from sliding into a recession.