Stocks at risk of a bubble after Fed's jumbo rate cut, BofA strategist says

By Joseph Adinolfi

Investors should continue buying gold and bonds instead

One Bank of America strategist believes this week's jumbo interest-rate cut by the Federal Reserve risks reigniting a potential bubble in stocks.

Stocks rallied on Thursday as traders came around to the idea that Chair Jerome Powell's "recalibration" of interest rates would help guide the U.S. economy toward a soft landing following the worst bout of inflation in four decades.

See: Dow surges to record as investors celebrate Fed's 'recalibration' rate cut

But although the Fed's rate-cutting plans are creating an almost-irresistible setup for stocks - as expectations for double-digit earnings growth in 2025 are paired with expectations for much-lower borrowing costs - investors should think twice before chasing the rally, said Bank of America strategist Michael Hartnett.

That's because the aggressive move is causing "bubble risks" to return for stocks. Hartnett favors buying the post-Fed dip in bonds and gold instead of caving to the pressure to chase the rally.

investors who feel they have no choice but to pour more money into risky assets should consider alternatives to U.S. equities, Hartnett said.

Commodities and international stocks are two potential alternatives. Both would likely benefit if the Fed achieves its hoped-for soft landing, while commodities offer the added benefit of effectively hedging against a resurgence of inflationary pressures.

This isn't Hartnett's first warning about a potential bubble for stocks. The acerbic strategist has said in multiple reports published over the past year or so that the artificial-intelligence craze has lifted valuations for megacap tech stocks to dizzyiing heights. They risked a re-run of the dot-com bubble as a result.

Treasury yields rose after the Fed announced its plans to cut its interest-rate target by 50 basis points on Wednesday, the first cut since the early days of the COVID-19 pandemic.

The Fed cut its interest-rate target by 50 basis points on Wednesday. Many economists and market strategists pointed out that the Fed has in the past reserved such aggressive moves for when the U.S. economy was teetering on the brink of recession, or facing a looming crisis.

But Powell explained during a press conference that waning inflation had allowed the central bank to shift its focus to the labor market in order to try and prevent a more painful downturn.

While stocks rallied on Thursday, investors were expressing a more cautious outlook on Friday, as stock futures pointed toward a lower open. The S&P 500 SPX and Dow Jones Industrial Average DJIA closed in record territory on Thursday. The Nasdaq Composite COMP also rallied sharply.

-Joseph Adinolfi

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

09-20-24 0906ET

Copyright (c) 2024 Dow Jones & Company, Inc.