Fed’s Gift to Investors: Wells Fargo Says Rate Cuts Will Drive Stock Market Higher
By the end of 2025, according to Wells Fargo strategists, the Federal Reserve will have lowered interest rates by 175 basis points (bps), which might lead to favourable economic conditions and possibilities for stock market investments.
According to Wells Fargo’s Senior Global Market Strategist Scott Wren, equity values grew stretched after a strong surge in the S&P 500 index (SPX), and a downturn was imminent.
According to Wrenn, Wells Fargo purposefully held off on pushing the equity markets higher, citing worries about exorbitant valuations and the possibility that the economy would continue to contract in the upcoming quarters. He identified impending challenges to consumer spending in the short- to medium-term as well as possible flaws in the labour market.
“Our analysis suggested investors were too optimistic as the SPX was notching new record highs,” he stated.
Nonetheless, Wells Fargo emphasised that market declines in the SPX might present opportunities for purchases, given its economic projections through the end of 2025.
This opportunity came about because of worries that the Federal Reserve was lagging behind in reducing interest rates, which were spurred by a lower jobs report and a disappointing manufacturing number in recent weeks.
After two trading days, the SPX had an intraday low, indicating a nearly 10% retreat from its highs. This led to calls for a “emergency” Fed meeting and an imminent rate cut by certain analysts and members of the financial media.
Although Wrenn rejected the notion of an emergency rate drop, he does believe that the Fed will lower rates by 100 basis points (bps) in total by the end of the year, beginning with a 50 bps cut at the policy meeting in September. In 2025, he also projects an extra 75 basis points to be cut.
“We think that as the year goes on, the economy will perform better as a result of the size of the fed funds rate reductions. Therefore, as previously said, we view market corrections as opportunities for purchases,” the strategist said.
Wrenn thinks investors should reallocate their money from long-term and short-term fixed income into large-cap and small-cap stocks in light of the recent market volatility.
Wrenn is still in favour of domestic equities over foreign markets and large caps over small caps.
