Why Wall Street is still bullish on stocks even with March rate cut hopes dashed

When Federal Reserve Chair Jerome Powell shut down investor hopes for a March interest rate cut on Wednesday, he also made an observation about the economy that many Wall Street stock bulls have been saying for months.

“We feel like inflation is coming down,” Powell said. “Growth has been strong. The labor market is strong.”

And perhaps most importantly, Powell said the latter two signs of economic strength aren’t as big of a threat to inflation’s downward trajectory anymore. In other words, good economic news should no longer be perceived as “bad” just because it could mean another Fed interest rate hike is coming.

Instead, good economic news is simply good news for the stock market because it means business activity is picking up. And in the long run, that's usually a welcome sign for investors.

This is why strategists haven't been concerned as data like Friday's shockingly strong January jobs report lowers bets on a Fed rate cut in March to less than 20%.

Big picture, it doesn't matter when exactly the Fed begins cutting. It's just crucial that the path forward is an easing of policy because that would create a constructive operating environment for companies.

"From a macroeconomic perspective, generally speaking, the US economy is the most important driver of equity performance broadly," Goldman Sachs equity strategist Ben Snider told Yahoo Finance last month.

He added, "I don't think it matters very much whether the Fed starts to cut in March or May or June. The key dynamic is that the Fed is incentivizing on-the-margin investors to move out of cash and reducing the cost of capital environment for small businesses that rely frequently on outside financing."

Snider confirmed with Yahoo Finance following Wednesday's Fed meeting that nothing Powell said in the Fed press conference changes his thinking. He pointed to Goldman's economics team's Fed forecast update after the January Fed meeting. Goldman now sees the first interest rate cut in May instead of March, but maintained a call for eight 25 basis point rate cuts in the next two years.

This narrative has played out in consensus estimates compiled by Bloomberg, too. As of Friday, the market projected interest rates to end 2024 around 4% despite Powell's comments and a strong jobs report last week. That's the same level as the prior two months.

In aggregate, this can be taken to mean that the story for 2024 and even 2025, at least in the view of some bullish strategists, hasn't changed.

Oppenheimer investment chief strategist John Stoltzfus shares a view with Snider that worrying about what month the Fed will cut rates is something best saved for short-term investors.

"When you look at the trading floors and the trading rooms, what they trade on is very different than what intermediate to long-term money managers like myself are going to be looking at," Stoltzfus told Yahoo Finance Live. "What we look at is: We don't think the Fed has thus far pushed the economy into a recession."

Many bulls, like BMO's Brian Belski, prefer not to speculate on the Fed's interest rate path.

Instead, they often point to underlying fundamentals, like earnings. And as TKer editor Sam Ro pointed out in the latest edition of the Yahoo Finance Chartbook, the earnings outlook for the next two years still shows growth.

"There's actually no analytical evidence that we're seeing any kind of earnings slowdown," Belski told Yahoo Finance in a recent phone interview.

Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.

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