Bank of America Analyst Warns Fed Rate Cuts Might Not Spark Equity Surge

Bank of America's Michael Hartnett has emphasized that the upcoming rate cuts by the Federal Reserve are unlikely to lead to a significant shift in funds towards U.S. equities. Instead, the critical factor that will determine whether the market can avoid a severe downturn is the ability of the Fed to achieve a “soft landing” for the economy.
Hartnett's remarks come amidst widespread speculation that the Fed will begin cutting rates in the near future. Investors and market analysts are closely watching recent economic data and Fed statements that suggest rate cuts are forthcoming, predicated on the inflation rate moving closer to the Fed's 2% target and signs of labor market cooling.
Despite these expectations, Hartnett cautions against overestimating the positive impact of these potential rate cuts on the stock market. He argues that liquidity injections or easing measures may not necessarily translate into a bullish run for equities, especially if economic fundamentals remain shaky or if there are significant risks of a hard landing.
Fed Chair Jerome Powell has indicated that the timing and pace of rate cuts will be data-dependent. This pointed focus on data reflects the mixed signals from the economy. Inflation appears to be moderating, with July’s Consumer Price Index (CPI) rising by 2.9% year-over-year, a slight dip from the previous month. However, the core CPI, which excludes food and energy prices, still remains above the Fed’s comfort zone at 3.2%.
Further, Powell underscored that while the labor market remains resilient, there are signs of cooling. Non-farm payrolls for July showed a sharp decline, rising unemployment rates to 4.3% and reducing job vacancy rates, signaling a potential easing of labor market pressures.
In reaction to Powell’s speech, markets have already priced in the likelihood of upcoming rate cuts. The U.S. dollar weakened, and U.S. Treasury yields declined. Equity markets responded positively, but Hartnett warns that these movements could be short-lived if underlying economic issues are not addressed.
The debate continues over whether the Fed's eventual move to cut rates will help or hurt the markets. A "soft landing" scenario, where inflation is brought under control without triggering a significant economic downturn, remains the optimistic case. Yet, the challenge lies in managing the balance between tightening to control inflation and easing enough to support economic growth without inducing a sharp correction in asset prices.
Hartnett's perspective highlights a cautious approach, suggesting that the Fed's policy path will heavily influence the market's trajectory. Investors should remain vigilant of the unfolding economic data and the Fed's subsequent actions, understanding that a mere reduction in interest rates may not serve as a panacea for market woes.