Wall Street believes that a 'single rate hike' is unlikely to end the bull market in US stocks; the real threat lies in sustained tightening and recession.
BlockBeats news, September 14 — As expectations of a Federal Reserve rate hike heat up, Wall Street strategists have not turned bearish on US stocks. The market now sees an 87% probability that the Fed will raise rates by 25 basis points this week, which, if realized, would be the first hike in three years. But Goldman Sachs, Morgan Stanley, and JPMorgan all believe that a single rate hike in itself may not change the medium-term trend of US stocks, with corporate earnings and economic growth still the key supports for the market.
Historical experience also shows that sustained tightening and the recessions it triggers are the more major drivers of US stock bear markets. Since 1945, the S&P 500 has experienced 12 bear markets with declines of more than 20% and 4 deep corrections of 18% to 20%, of which 6 occurred after rate hike cycles directly led to recessions, while another two were unrelated to both rate hikes and recessions.
Goldman Sachs said the market has already priced in expectations of more than 3 rate hikes over the next year, and corporate earnings and balance sheets remain relatively solid, so the policy shift itself may have a limited impact on stocks. Morgan Stanley warned that if inflation shocks push the 10-year US Treasury yield further higher, US stocks could see a technical correction of about 10%; but if the rise in yields mainly reflects strong economic growth rather than runaway inflation, stocks still have room to withstand it.
JPMorgan, meanwhile, views oil prices as a key near-term variable. Oil prices staying above $100 could push up inflation expectations and compress equity valuations, while if oil price pressure eases, the market will find it easier to digest the impact of rate hikes. The S&P 500 is currently less than 2% from its record high, but the 10-year US Treasury yield is approaching 5%, Nasdaq 100 futures fell about 1.6% on Monday, and short-term market volatility may still intensify.
