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The FOMC decided to maintain its benchmark rate within a range of 5.25% to 5.5%. This decision comes in the wake of recent indications that the 11 rate hikes implemented by the Fed are beginning to have an impact on controlling inflation.
The updated dot plot sees just two rate cuts next year, which facilitate a near 1% drop in the S&P 500 on Wednesday.
With the Fed out of the way (the next FOMC decision is due on November 01), analysts see the S&P 500 in position to rally to 4,600. One of the potential drivers could be credit.
“We believe the credit calendar’s liquidity demands and its upward influence on interest rates is a key factor in September’s seasonal weakness. However, we are ~90% done with September’s expected debt issuance, and after some earlier weakness investment-grade (IG) spreads are now flat MTD. We now view the credit calendar and the level of credit spreads as near-term positives for equities,” the analysts wrote in a report.
Moreover, they note “limited” and “fairly benign” pre-announcements, which are positive for the outlook. Another plus is the IPO market, which is warming up after recent offerings.
“The equity calendar has warmed up, and that heat has spilled into the broader market,” analysts added.
They also have advice for investors on what to own going into year-end.
“Investors should not get carried away with the hype of a year end rally, which we see as an opportunity to reposition the portfolio. Initially we recommend uber-caps as they are perceived as the “all-weather trade,” but eventually we will want to lean into Pharma. Defensive sectors are languishing around oversold levels. The group reached comparable oversold levels in late 2018 and late 2021 before a major reversal. Relative value is notable,” analysts concluded.
The S&P 500 closed at 4,402.20 yesterday.
