📈 69% of S&P 500 stocks beating the index - a historic record! Pick the best ones with AI.See top stocks

Aggressive Fed cuts could yield a new stock market bubble, UBS warns

Published 09/19/2024, 08:11 AM
Updated 09/19/2024, 11:22 AM
© Reuters.
US500
-

Investing.com -- UBS analysts said in a note that aggressive rate cuts by the Federal Reserve could set the stage for a new stock market bubble.

In their recent note, UBS explains that historically, markets have reacted positively in the short term after the first rate cut, gaining an average of 4% over eight months.

"If there was a recession, markets were down 10%; if there was not, they were up 20% - (with recessions happening on average 5 months after the start of the rate cut with a recession occurring 55% of the time over the period)," said UBS

UBS is concerned that a more aggressive Federal Reserve could drive rates lower than expected, potentially triggering a bubble.

They point out that the market expects a trough Fed Funds rate of 2.8%, while historically, rates have fallen below neutral levels during downturns.

UBS argues that a weaker economy, less sensitive to rate changes than in the past, could push rates lower and weaken the U.S. dollar, forecasting EUR/USD at 1.15 and JPY/USD at 130 by the end of 2025.

For equities, the analysts are cautious, noting that stock markets have already seen significant gains leading up to the anticipated rate cuts, leaving limited room for further upside without worsening economic news.

"Equities are only marginally cheap if you believe (as we do but many don't) that Gen AI will push up productivity growth by 1% from 2028," says UBS.

The upside risk, however, is that an aggressive Fed could create conditions for a market bubble.

"Short-end-led yield curve steepening is good for consumer (ex luxury) and defensives," adds the bank. "We stay overweight these two areas (see here). Style: We think small caps outperform (3X more floating rate debt than large cap), quality outperforms and to a lesser extent so do growth stocks."

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.