JPMorgan strategists see last big Fed rate hike in September

(Bloomberg) — The Federal Reserve is likely to deliver the last of its big rate hikes in September, setting up stocks to continue rallying in the second half, according to JPMorgan Chase & Co. strategists.

“We expect another outsized Fed hike in September, but post that we would look for the Fed not to surprise the markets on the hawkish side again,” strategists led by Mislav Matejka wrote in a note on Monday. They expect the trade-off between growth and monetary policy to improve from here on, and “help the overall market to keep recovering.”

The strategists are among the most bullish top-ranked voices on US equities and expect rate-sensitive growth stocks to maintain their outperformance over the value basket, even as investors remain worried that the Fed could remain on a hawkish course.

Mixed signals from Fed officials last week on the outlook for rates led the S&P 500 to snap a four-week winning streak. The main underlying indexes were set to resume declines on Monday, with Nasdaq futures falling 1.6% and S&P 500 contracts down 1.2%.

A Bloomberg survey found that on average top strategists see the S&P 500 rallying another 3.5% from current levels to the end of the year.

Those at Goldman Sachs Group Inc. agree that the path of inflation and growth will drive the trajectory of stocks in the second half. But they see limited room for gains after US stocks enjoyed one of their best summer rallies on record. “Renewed fears about the prospect of a recession would almost surely unwind the recent rally,” strategist David J. Kostin wrote in a note.

HSBC Plc strategists also remain “maximum underweight” in equities, saying market inconsistencies have left all asset classes looking vulnerable.

Recession Fears Set to Split Stocks and Bonds After Summer Rally

All eyes this week are on the Fed’s Jackson Hole symposium, where Chair Jerome Powell will have a chance to reset market expectations about rate hikes. Technology stocks come under particular pressure from higher rates as they mean a bigger discount for the present value of future profits, hurting those with the highest valuations, while boosting so-called value shares.

While the technology-heavy Nasdaq 100 rallied more than 20% from a June low as bond yields retreated and investors bet that the Fed will soften its rate hikes, it declined again last week to snap a four-week winning streak. UBS Global Wealth Management’s Mark Haefele on Monday warned investors against chasing the rebound as valuations get expensive again.

“We suggest investors use the rally in tech to reduce positioning in excess of recommended benchmarks and to lighten portfolio exposure to high beta names, rebalancing funds to our preferred areas of the market like value and quality income,” Haefele wrote in a note.

(Updates with US stock futures and HSBC comments from fourth paragraph)

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