A big Fed meeting looms in the week ahead as economic concerns percolate

It’s finally here. The Federal Reserve is set to meet Tuesday and Wednesday — and is is widely anticipated to make its first interest rate cut after embarking on a hiking campaign in March 2022. Back then, the overnight lending rate was anchored near zero; now, it’s at 5.25% to 5.5%. It’s a long-awaited meeting for investors who hope the start of easing monetary policy will boost earnings growth for companies — especially interest-rate sensitive businesses — that had been struggling with higher inflation and elevated borrowing costs. But recent signs of slowing economic growth have investors fearful the Fed may be forced to cut for the wrong reasons, a concern that has cast a pall around the central bank’s meeting — especially as the S & P 500 once again approaches record highs. “To the extent that we are cutting rates … because disinflation has proceeded well, or maybe a little better than expected, perhaps that’s very positive for the equity markets,” Binky Chadha, chief U.S. equity and global strategist at Deutsche Bank, told CNBC’s ” The Exchange ” on Thursday. “But if you’re cutting because we’re concerned about growth, that’s very bad for equity markets.” As it is, stocks are up ahead of the meeting, with the S & P 500 and Nasdaq Composite on Friday posting their best weeks of 2024 . The Dow Jones Industrial Average has gained more than 2%, while the S & P 500 is higher by roughly 4%. The Nasdaq Composite is higher by more than 5%. 25 or 50 basis points? On Friday, the CME FedWatch tool showed markets were split how big the rate cut would be. About 53% of traders see a 25 basis point cut taking place, while the remaining 47% expect a larger 50 basis point reduction. “If they were cutting by 50, that would tell me the Fed was actually much more concerned about the economy slipping into a recession than they were about making sure inflation remains on that downward path that it’s currently on,” said Dave Sekera, chief U.S. market strategist at Morningstar. “So if there were a 50 basis point cut, I think the market would actually sell off on that news.” Investors will also watch what Fed policymakers will signal in its summary of economy projections regarding future policy moves. FedWatch shows that markets are currently pricing in a 1.25 percentage point drop in the fed funds rate by the end of 2024 to a 4%-4.25% range. S & P nears record: Buy the rumor, sell the news? The stock run-up heading into the meeting has Giuseppe Sette, co-founder and president at Toggle AI, worried that valuations are too lofty. He worries that stocks will rally heading into the central bank meeting, with investors possibly selling the news afterward. “I think that we’re basically living through the peaks of this cycle. And next week is going to give another test this peak, which I expect to fail, that we’re going to retrace,” Sette said. BTIG’s Jonathan Krinsky noted the S & P 500 will likely notch a new all-time high next week, as it is less than 1% away from its July record. This development would make the post-Fed stock playbook “trickier” for investors, he said. Still, Morningstar’s Sekera said he advises investors stay exposed more so to value than growth stocks. He also considers small cap stocks a buying opportunity, while remaining underweight large caps. Some individual sectors that appear attractive to the strategist includes communications and energy. U.S. Bank Asset Management Group’s Bill Northey has a more cautious approach. His firm downgraded large-cap U.S. equities. It also moved up to neutral on its core fixed income allocation from underweight previously. Separately, the August retail sales data due out Tuesday is expected to show consumer spending about flat last month from a 1% gain the prior month, according to FactSet consensus estimates. Notable earnings results coming next week include food company General Mills, as well as Olive Garden parent company Darden Restaurants. Quarterly reports from homebuilder Lennar and shipping company FedEx will give further insight into the economy. Week ahead calendar All times ET. Monday Sept. 16 8:30 a.m. Empire State Index (September) Tuesday Sept. 17 8:30 a.m. Retail Sales (August) 9:15 a.m. Capacity Utilization (August) 9:15 a.m. Industrial Production (August) 9:15 a.m. Manufacturing Production (August) 10 a.m. Business Inventories (July) 10 a.m. NAHB Housing Market Index (September) Wednesday Sept. 18 8:30 a.m. Building Permits preliminary (August) 8:30 a.m. Housing Starts (August) 2 p.m. FOMC Meeting 2 p.m. Fed Funds Target Upper Bound Earnings : General Mills Thursday Sept. 19 8:30 a.m. Current Account (Q2) 8:30 a.m. Continuing Jobless Claims (09/07) 8:30 a.m. Initial Claims (09/14) 8:30 a.m. Philadelphia Fed Index (September) 10 a.m. Existing Home Sales (August) 10 a.m. Leading Indicators (August) Earnings: Lennar , FedEx , Darden Restaurants Friday Sept. 20