Is The ‘Fed Put’ Back On The Table?

We witnessed another momentous week as the Federal Reserve’s tone on markets was more dovish than anticipated. Jay Powell said that the Fed still expects three rate cuts this year, which helps enable a highly constructive backdrop for stocks and other risk assets. Moreover, with the Fed in QT wind-down mode, the “Fed Put” is essentially back on the table.

The market knows that more accessible monetary policy offers benefits like lower rates, easier lending standards, increasing liquidity, potential backstops, possible future rounds of QE, and much more. Furthermore, we’re still around the high of a tightening cycle. Thus, the easy monetary atmosphere is only beginning, with likely years of economic and monetary base expansion ahead.

Meanwhile, the S&P 500 (SP500) “SPX” continues to climb the wall of worry, seemingly hitting new ATH after new ATH almost every day as the underlying and future market dynamic is highly favorable for stocks.

While the market continues marching higher and higher, we may still see a pullback develop at any time. However, earnings season is almost upon us again. Thus, if we see a pullback, it may be shallow due to high interest relative to many earnings coming out in future weeks. This dynamic is particularly true of AI-related earnings like Nvidia, AMD, SMCI, Amazon, Meta, Alphabet, and many other stocks.

The 5,100-5,200 level is a significant support level here in the SPX, and if it breaks down, we could see a shallow correction to the 4,900-5,000 zone. In a slightly more bearish scenario, we may see the pullback drag the SPX down to around the 4,700-4,800 level. A deeper correction seems improbable here without a clear catalyst (black swan event). Nonetheless, a deep correction could send the SPX down to the 4,500-4,600 zone (an unlikely scenario, in my view).

Critical Data – The PCE

This week’s crucial data points include durable goods, consumer confidence, GDP, and the all-important inflation reading, the core PCE. The core-PCE is the gauge the Fed watches most closely. The market expects a 2.8% core PCE read, and we want to see 2.8% or lower. 2.9% may also be accepted as a temporary uptick, but a 3% or higher PCE could spark a considerable pullback in stocks. Therefore, we’d like a 2.8% reading or lower, preferably a 2.7% read, which would likely be greeted warmly by the market.

Rate Probabilities Are Moving In The Right Direction

We’ve recently seen improvements in rate cut probabilities, especially after the Fed’s recent dovish speech after the FOMC event. There is now about a 70% probability that we will see a cut during the June meeting, and the probabilities are over 80% for a cut by July. We will likely see a rate cut soon, and the cycle is only starting here. Therefore, we should see plenty of stimulus down the line, which is a bullish dynamic for stocks and other risk assets. Moreover, the Fed is set to wind down QT, likely by year-end, a dynamic that should open the door for future QE rounds, another constructive element for equities and risk assets.

Looking Forward To Earnings Season

Time flies, and big banks kick off earnings season in about two weeks. JPMorgan (JPM), Wells Fargo (WFC) and Citigroup (C) report on April 12, and there will be many more after that. Market participants look forward to many earnings, especially the AI-driven results from top tech companies like Nvidia (NVDA), AMD (AMD), and others. Therefore, earnings could be another positive catalyst for increasing stock prices as we advance.

Valuation – Still Not Expensive

While the TTM valuation may appear slightly elevated, forward earnings are still not expensive, in my view, especially considering the more accessible monetary environment the Fed is likely to provide. The R2K trades below a 25-forward P/E multiple, which is exceptionally cheap for small/mid caps, and they are going into a more accessible monetary atmosphere.

The Bottom Line: Buy The Dip

Top tech below a 28-forward P/E is also relatively inexpensive, considering the growth opportunities in AI and other segments. The SPX trades around 21.5 times forward EPS estimates, which is also relatively inexpensive considering the potential for economic growth, lower interest rates, and other favorable tailwinds for stocks. I will welcome a 5-10% correction in the market to buy the dip in many high-quality stocks. Several of my favorite stocks here include AMD, Tesla (TSLA), and Tencent (OTCPK:TCEHY). My year-end SPX target range remains 5.8-6K.