Home BusinessEconomic News Stocks sink on Wall Street fears of higher rates for longer: Stock market news today

Stocks sink on Wall Street fears of higher rates for longer: Stock market news today

by Clarence Jones

Higher for longer might not be as bad as some fear for stocks, according to strategist Tom Lee from Fundstrat. Stocks took a hit following the Federal Reserve’s message that interest rates will remain higher for longer than initially anticipated. The S&P 500 fell over 2% in just two days, and the yield on the benchmark 10-year Treasury reached its highest level in 15 years. Bank of America data also revealed that investors dumped equities at the highest pace since December 2022.

However, Lee believes that this reaction may have been overdone. He views the market’s response to the Federal Open Market Committee (FOMC) meeting as overly hawkish. Lee specifically disagrees with one of the key factors driving the market action, which is the Federal Reserve’s updated Summary of Economic Projections (SEP). The SEP indicated a bias toward one more interest rate hike in 2023 and showed that interest rates are expected to remain higher than initially forecasted in both 2024 and 2025.

Despite this, Lee does not consider these projections to be a major concern. He argues that higher rates for a more sustained period align with the Fed’s increased outlook for Gross Domestic Product (GDP). Fed Chair Jerome Powell also emphasized during a press conference that economic growth, rather than inflation, would be the driving force behind another rate hike.

In Lee’s view, the combination of higher interest rates and higher GDP not only makes sense but could also lead to higher price-to-earnings (P/E) ratios as the economy expands. This, in turn, may result in higher stock valuations. Lee stated in a note to clients that a “hawkish take would be inflation persistence went up and therefore Fed funds needs to stay high.” However, he points out that the Fed’s projections do not anticipate an increase in inflation.

Overall, while the market initially reacted negatively to the prospect of higher rates for a longer period, some experts, such as Tom Lee, believe that this reaction may be exaggerated. Understanding the broader economic context and the Fed’s rationale behind its projections can provide a more balanced perspective on the potential impact on stocks.

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