Market is ‘stretched’: Strategist

Several Federal Reserve officials are set to speak this week, and investors are likely to watch for indications about the Fed’s next move in the rate-cutting cycle. Tematica Research CIO Chris Versace joins Josh Lipton and Madison Mills on Market Domination to discuss what to expect and how the market could react.

“We’ve got about a dozen Fed speakers this week, including the big dog Fed chair Powell on Thursday and everybody is trying to figure out, we’ve got two meetings left in the balance of the year. If they do 50, how is it going to be spread? I’m more in line thinking that, if we get 50, it’s going to be in 25 basis point increments,” Versace says.

He tells Yahoo Finance, “We’re going to have to follow the data and see whether or not 50 is actually on the table, you know, if we take a look at some of the data we got today, the S&P Global flash PMI, it says the employment market weakened for the second consecutive month. That probably means that the Fed is likely to do more than not, but we’ve got a slew of data coming.”

He says “The biggest mistake that the market has made in misjudging what the Fed is likely to do is the market getting out over its skis, anticipating too much. This time around that we saw this last-minute shift from 25 to 50.”

Versace encourages investors to watch the economic data to determine what to expect from the Fed. “We need to triangulate around the data, not just the employment data, but everything else about inflation, the speed of the economy. That’s going to be hard economic data.”

The analyst notes the market is “stretched,” saying “the big question to me going forward is if earnings expectations continue to slow for the second half of the year compared to the first half, it means the market’s even more expensive and then we have to start looking forward.”

He adds, “The question is, can the economy and the market deliver almost 15% earnings growth next year? Yeah, we know the Fed is going to be cutting, potentially another 50, potentially another 100 basis points next year. But you know this is the discrepancy between no landing, soft landing, [and] hard landing. And that’s what we’re trying to figure out.”

The analyst says there’s a variety of factors what could catalyze a potential pullback in equities including investor sentiment with “people just being concerned that the market is stretched, near-term overbought, and the valuation is extended.” Other potential causes for a downturn are the upcoming longshoremen strike, perception of the Fed’s actions, election worries, and earnings growth.

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This post was written by Naomi Buchanan.