A post-Fed rally | skepticism towards equities is still prevalent among institutional investors

 

There’s gas in the tank for a post-Fed rally so stick with the stock-market winners, says Wall Street bull

Fed day is finally here, and hopefully, the answer to burning questions about rate-cutting plans from the world’s most important central bank.

As we wait to see how the Fed’s words play out on Wall Street, our call of the day,is from the head of research at Fundstrat Global Advisors, Tom Lee, who says there will be a post-decision rally, offering five reasons for that.

One of Wall Street’s biggest and most enduring bulls, Lee correctly called the 2023 equity rally and sees the S&P 500 ending 2024 at 5,200, which he has said may be too conservative.

Lee acknowledges pre-Fed investor caution, which he attributes to January’s red-hot inflation data and easing financial conditions. He also finds investors seemingly in disbelief that stocks continue to rise despite January’s hot CPI data, recession worries, extreme valuations, still dominant Big Tech and hype around AI.

So in order for stocks to rally, some kind of surprise or relief element would be needed, which he expects. In the first of his five reasons, Lee talks about how stocks have been easing just a bit into the Fed meeting, which puts the odds in favor of equity gains.

“When you look at the last two years worth of rate decisions, when stocks are soft into the FOMC, they rally four out of seven times. It’s not a high probability…but it just shows you that there are things that can improve the odds, but at least the base case is that it’s probable that we rally after the FOMC,” Lee tells clients in an update.

The second reason surrounds softening interest rates, which can work in equities’ favor. Fundstrat’s head of technical strategy Mark Newton sees the 10-year Treasury yield at a peak:

Thirdly, the market has already priced in “bad news” — three instead of seven interest rate cuts that may not start until September.

Fourth, Fed Chair Jerome Powell was dovish to Congress earlier this month, and the strategist sees no reason why he would shift that stance on Wednesday.

Finally, the “gas-in-the-tank,” reason and for that, Fundstrat’s Newton has laid out a bullish technical setup. “We find investors become reflexively bearish every time the market starts to wobble. As long as ‘top calling’ remains the default mode, we think stocks are likely to continue to surprise to the upside,” says Lee.

Fundstrat sees the S&P 500 possibly reaching 5,250 to 5,300 in the aftermath of Wednesday’s meeting.

Lee says the “skepticism towards equities is still prevalent among institutional investors that we have visited with recently. And this caution, coupled with their expectation of a ‘hawkish’ Fed is the reason we expect stocks to rally.”

As for where to invest, despite some recent wariness around Nvidia, Lee says investors should “stick with what is working” this year, such as the AI theme — Nvidia NVDA, Cadence Design Systems CDNS, Arm Holdings ARM, Advanced Micro Devices AMD and the Global X Artificial Intelligence & Technology ETF .

Also don’t shed those weight-loss linked stocks such as Eli Lilly LLY and Novo Nordisk NVO or financials via Industrial Select Sector SPDR ETF and industrials via Financial Select Sector SPDR . He also is sticking with bitcoin and its proxies — Marathon Digital MARA, PayPal PYPL, Coinbase COIN and MicroStrategy MSTR.

Stocks are struggling for traction, with bond yields also largely unchanged pre-Fed. Continued dollar strength has pushed the yen USDJPY close to multi-decade lows. Mr. Yen says intervention could happen soon. Oil CL is down over 1%.

Bitcoin BTCUSD has pared losses and is back up above $63,900, but some see sub-$60,000 possible amid ETFs outflows.

The buzz

The Fed is expected to leave key interest rates unchanged at the conclusion of its two-day meeting in a decision due at 2 p.m. All eyes on the “dot plot” for rate forecasts and a news conference with Chairman Powell at 2:30 p.m. Follow MarketWatch’s Live Coverage

PDD shares PDD are flying after the parent of fast-fashion platform Temu reported forecast-beating results.

Chipotle stock CMG is up 6% after the burrito chain said its board approved a 50-for-1 stock split. General Mills shares are headed for a 7-month high on a confirmed outlook and upbeat results.

BioNTech BNTX stock is dropping on earnings disappointment from the vaccine maker.

Intel INTC will get up to $8.5 billion in federal funding via the Chips Act, and the chip company’s stock is up 3%. Elsewhere, the Biden administration reportedly may blacklist several Chinese chip firms linked to Huawei.

Chip connectivity product maker Astera Labs will make its Nasdaq debut under symbol ALAB , after pricing its IPO above target range.

Read: Post-IPO, Reddit will still be the ‘quirky goth kid’ to Google and Facebook’s ‘varsity quarterbacks’

Boeing’s BA chief financial officer said cash flow will be worse than the company expected back in January after a spate of incidents.

Amid slumping China sales, Apple AAPL CEO Tim Cook is in Shanghai to open a new store.

JPMorgan Chase JPM is hiking its quarterly dividend by 9.5%.

The chart

Living on borrowed time. That is, the Big Tech rally, says a team of strategists at UBS led by Jonathan Golub. While valuation for the group that no longer includes Tesla — UBS calls it the Big Six — is 16% cheaper than in December, earnings momentum is the bigger problem. They see that deteriorating rapidly into this year. Here’s their chart:

Top tickers

These were the top-searched tickers on MarketWatch as of 6 a.m.:

Ticker	Security name
NVDA	Nvidia
TSLA	Tesla
SMCI	Super Micro Computer
AMD	Advanced Micro Devices
AAPL	Apple
NIO	Nio
MSTR	MicroStrategy
TSM	Taiwan Semiconductor Manufacturing
GME	GameStop
AMZN	Amazon.com