Strategist Proclaims S&P 500 Does Not Always Follow the Fed’s ‘Economic Drum’

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Strategist Proclaims S&P 500 Does Not Always Follow the Fed’s ‘Economic Drum’

The Federal Open Market Committee (FOMC) will meet this Wednesday. While news from the Federal Reserve has impacted markets in the past, so far US Equities (^GSPC, ^DJI, ^IXIC) have remained steady and in the green on Monday.

Citi US Equity Strategist & Managing Director Scott Chronert joins Yahoo Finance to discuss the upcoming FOMC meeting and its impact on the broader market

Chronert weighs in on the factors holding the most sway over the market this week: “I think the Fed expectations are pretty well anchored. I don’t know that we’ll see too much as a distinct surprise. Although your point on the recent direction of 10-year nominal yields up to 4.30[%] now is pretty relevant because, all other things equal, that should begin to take some of the valuation wind out of the Mag Seven sales.”

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Editor’s note: This article was written by Nicholas Jacobino

Video Transcript

JOSH LIPTON: It’s interesting, Scott. I’m looking at this market here. So we push back these expectations of when the Fed’s going to cut and how much they’re going to cut, Scott.

And I got the yield on the 10-year back up to 433. But I see green across my screen here, Scott. All three major averages in the green right now.

SCOTT CHRONERT: Josh, great observation. I think what we’re looking at here is ongoing confidence in a new growth engine for the broader market, courtesy of generative AI. You guys have covered that.

And what that does is it begins to put some bounds around the influence of the Fed at least in a short-term basis on the underlying market action. And right now, what you’re looking at is consensus expectations, including I think out of our economists is for sort of a mid-year first Fed rate cut. So we’ll be looking at the commentary.

But all told while you are navigating this interest rate influence under the surface, the market does seem to be getting more and more comfortable that there is an emerging incremental growth driver for equities courtesy of generative AI.

MADISON MILLS: So given that, Scott, what matters more to equities this week NVIDIA or the Fed?

SCOTT CHRONERT: Madi, I think it’s probably the former, right? I think the Fed expectations are pretty well anchored. I don’t know that we’ll see too much. That’s a distinct surprise.

Although your point on the recent direction of 10-year nominal yields up to 430 now is pretty relevant because all other things equal, that should begin to take some of the valuation wind out of the Mag Seven sales.

JOSH LIPTON: So, Scott, with the big Fed meeting this week, I’m just interested, does the Fed have to cut for this market to move higher here, Scott, or no? We should stay focused on the economy and corporate profits?

SCOTT CHRONERT: So, you know, again, be careful what you’re looking for. We want to see the Fed cut because they’re in restrictive territory. We think that inflation gradually is decelerating.

And so there’s room for them to become less restrictive as we go through the balance of this year. On the other side of the coin, keep in mind that inflation has been a fundamental tailwind for S&P 500 fundamentals. Nominal GDP is pretty highly correlated to sales.

So to a certain degree, what you get with a little bit higher than expected or wished for inflation is a little bit more confidence in underlying fundamentals. And on that front, we remain quite bullish on the S&P earnings picture this year, almost irregardless of the Fed action short-term.

MADISON MILLS: Well, I’m curious then, because I know that you’ve talked about the increase in CapEx for the S&P 500 companies. It makes me wonder about this question of the impact of Fed rates that you kind of just mentioned. If large companies can continue to spend, can keep their debt financed at around 3%, is the Fed having an impact on corporate America?

SCOTT CHRONERT: I think what we have to keep in mind is Wall Street versus Main Street. And I think the S&P 500 in aggregate beats to a little bit lesser economic drum than is commonly perceived. As an example, the Mag Seven, big seven since a year ago at this time to now, 24 earnings growth expectations are 24% higher. And that’s even with the Fed rate hike trajectory behind us.

So to a certain degree, what you have to weigh here is where expectations for company specific, and therefore, industry growth are setting up versus the Fed response, and whether that mechanism actually begins to choke it off. We think that mechanism is a little bit less directly correlated than commonly perceived.

JOSH LIPTON: Scott, I’m interested to get your take on another variable here, which is insider activity. And I asked Scott just because I saw some interesting research today that said, insider buying has been very light versus selling. And some are saying, OK, well, that’s a sign of caution by executives and directors. Just as a strategist, Scott, how much weight if at all do you place on that dynamic of insider activity?

SCOTT CHRONERT: I think it’s a little bit more relevant to the company specific level. Trying to make an aggregate conclusion off of it is difficult. You have to remember that most of the insiders that are sort of c-suite components see a pretty decent percentage of their comp in the form of stock-based compensation.

And so when you look for the insider buying signal, it’s a little bit less dramatic than commonly perceived. What I do want to do is make the point of though going back to Maddie’s question on CapEx is that when you look at where CEO spending intentions are here, they’re starting to get a little bit more constructive. And in our minds are starting to set up for a little bit more of an early cycle discussion.

So all in insider buying, insider selling we think in aggregate, it’s a positive read through for equities. When we look at what’s happening with the CapEx trajectories here, we think, A, there’s a catch up versus several years of no real incremental increase in CapEx from 2015 to say 2020. But now, what we’re seeing B is a more consistent uptake as companies are beginning to invest for future growth. That’s a pretty big deal.

JOSH LIPTON: Scott, thanks so much for helping us kick off the show today. Always appreciate your time.

SCOTT CHRONERT: You bet.

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