Wall Street Prepares for the Final Week of 2024
Wall Street enters the final week of 2024, analysts weigh in on market trends, interest rate decisions, and economic data. What can investors expect? Find out here.
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Dec 22 2024
Key Highlights
As we enter the final week of trading in 2024, Wall Street is grappling with the aftereffects of the Federal Reserve's decision to lower interest rates by 0.25% last Wednesday. While the markets briefly recovered some of their losses on Friday, investors are still processing the implications of this move, with many analysts concerned about the broader impact on market sentiment and economic growth. In this article, we will delve into the analysts' perspectives on the current state of the markets, what the future holds, and what investors should be aware of as the year draws to a close.
Rate Cut and Its Immediate Impact
The Federal Reserve announced a quarter-point rate cut, a decision that sent shockwaves through Wall Street. While many had expected a rate cut, the magnitude of the reaction suggests that investors were anticipating a more aggressive approach from the central bank. The Fed's revised forecast, which now projects only two rate cuts in 2025 instead of the anticipated three to four, has left investors feeling uneasy.
"The Fed signaled a lack of confidence regarding the future path of interest rates," says Bill Papadocic, senior macro strategist at Lombard Odier Investment Bank. "The growth rate this year has exceeded expectations, yet inflation remains higher than desirable, leading to an overall cautious outlook. The market is now adjusting to the Fed's more conservative stance, and it has triggered significant volatility."
Despite the rate cut, the Fed’s inflation forecast for 2025 was adjusted upward from 2.2% to 2.5%, signaling that inflationary pressures may persist longer than originally anticipated. The long-term interest rate forecast also rose from 2.875% to 3%, further fueling market uncertainty.
Market Sentiment
While some analysts view the recent market corrections as short-term adjustments, others are more cautious about the future of U.S. equities. The massive sell-off on Wednesday, with the S&P 500 dropping by nearly 3% and the Nasdaq falling by 3.6%, left many investors questioning the sustainability of the market’s recent rally.
"The correction in the market was exacerbated by heavy positions held by short-term investors and overvaluations in the U.S. market," says Papadocic. "Investor concerns were briefly focused on inflation risks following the Fed’s decision. However, with strong growth prospects remaining intact, we believe this is a short-term correction, and we expect potential gains in U.S. stocks next year."
In fact, analysts from Lombard Odier predict that the S&P 500 could reach 6,450 by the end of 2025, a 9.8% increase in the next 12 months. This forecast is supported by expected earnings growth of 10%, driven by broader market participation.
Inflation Concerns
Despite concerns over inflation, there are signs that inflationary pressures may not be as severe as feared. U.S. consumer spending has remained robust, with the annual growth rate in real private consumption improving in recent months. The Purchasing Managers' Index (PMI) for the services sector rose to 58.5, the highest level in three years, signaling a healthy and expanding economy.
Moreover, the Federal Reserve's business survey in Atlanta revealed a decrease in expected price increases, with businesses reporting a 2% annual change, the lowest since 2020. This data has led some analysts to downplay fears of runaway inflation in the near term.
"We are less worried about inflation at this point," says an analyst from a leading investment firm. "The recent data from the Fed's business survey suggests that inflationary pressures are gradually easing. However, it's crucial to remain vigilant, as the economic environment remains fluid."
Will There Be a Year-End Rally?
With the holiday season upon us and the markets entering the final stretch of 2024, many investors are wondering whether a traditional year-end rally will occur. Historically, the end of the year has often seen positive momentum as markets reflect improved sentiment and potential tax-related buying. However, analysts are divided on the likelihood of such a rally this year.
Violeta Todorova, a research analyst at Leverage Shares, notes that recent declines have reduced the chances of a typical year-end rally. "The declines in the markets are a reminder that the optimism seen in recent weeks may have been exaggerated," she states. "Year-end rallies typically occur under more favorable conditions with a more positive sentiment. With the 10-year Treasury yields back at their highest levels in six months and the S&P 500 trading above its historical price-to-earnings (P/E) average, the probability of a significant year-end rally has diminished."
Despite the turbulence in the stock market, the underlying fundamentals of the U.S. economy remain strong. Economic growth continues to outpace expectations, with a solid fourth-quarter outlook. The labor market, though showing signs of cooling, remains relatively strong, and inflation, while still a concern, appears to be moderating.
"The risk to U.S. growth is now greater than the risk of inflation," says an analyst from a leading investment firm. "While inflation remains a key concern, the bigger challenge moving forward will be managing economic growth without triggering excessive inflation. We believe that 2025 will bring more uncertainty, but the risks to growth appear to outweigh those of inflation at this stage."
The Final Weeks of 2024
As we head into the final week of 2024, the markets are entering a period of heightened volatility. Investors are still digesting the Fed's decision on interest rates, and concerns about inflation and economic growth continue to loom large. While some analysts remain optimistic about long-term growth prospects, others caution that the recent corrections could signal a more challenging path ahead.
The holiday-shortened trading week may limit market movement, but investors should be prepared for continued uncertainty. With the market still processing the Fed's rate cut and the economic outlook for 2025 uncertain, staying informed and cautious will be crucial as we enter the final days of the year.
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Please note that the article should not be considered as investment advice or marketing, and it does not take into account the personal data and requirements of any individual. It is not a substitute for the reader's own judgment, and it should not be considered as advice or recommendation for buying or selling any securities or financial products.
