The stock market is poised for a sell-off as an overly hawkish Fed could dash hopes for interest rate cuts, Morgan Stanley's Mike Wilson says
as the market currently expects, but hawkish comments from the Fed could also reprice current interest rate expectations from cuts by the end of the year to a long-standing pause.
"We've found that investors are less focused on the upcoming Fed meeting as a potential risk event for equities," Wilson said in a Monday note. But the FOMC meeting on Tuesday and Wednesday could turn into a catalyst for lower equity prices if Fed chairman Jerome Powell alters the market's view about the future direction of interest rates.
"If the message delivered at this meeting is more hawkish, it could provide a near-term negative surprise for equities," Wilson said. The market currently expects a 25-basis-point interest rate hike on Wednesday, followed by a pause that lasts until the two last FOMC meetings in November and December, in which two 25 basis point interest rate cuts are forecasted, according to theInstead, Wilson expects the Fed to pause interest rate hikes and cuts through the end of the year, essentially leaving the Fed Funds rate at a constant level of just over 5%.
"Should the message delivered at this meeting lead to a re-pricing of bond market expectations for rate cuts in the second half of '23, that could ultimately be a negative surprise for equities," Wilson explained.up nearly 10% year-to-date. Also boosting Wilson's confidence in his outlook is the fact that the upcoming FOMC meeting on Wednesday"is one of the least talked about in recent memory," Wilson said.
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