S&P500 and Nasdaq Index: Defensive Stocks May Outperform Post-Fed Decision

Fed Rate Cut Speculation Keeps Markets Flat as Traders Anticipate Decision

Wall Street’s main indexes are trading steady-to-better at the mid-session on Wednesday as investors awaited a pivotal Federal Reserve decision regarding interest rates. The market is pricing in a 25-basis-point cut, but anticipation has grown around the possibility of a more aggressive 50-basis-point reduction. This marks the first rate cut in over four years, sparking uncertainty among traders over the scale of the Fed’s move. Traders are being cautious ahead of the announcement, which is scheduled for 18:00 GMT.

At 17:08 GMT, the Dow Jones Industrial Average is trading 41634.31, up 28.13 or +0.07%. The S&P 500 Index is at 5640.80, up 6.22 or +0.11% and the Nasdaq is trading 17650.40, up 22.34 or +0.13%.

Market Divided Over Size of the Rate Cut

According to LSEG data, financial markets currently estimate a 56% chance of a 50-basis-point cut, a significant increase from just 14% last week. However, these odds are still below the peak of 63% seen earlier in the day. This volatility has created a heightened atmosphere in the market. “You’d have to go back over 15 years to find such an uncertain situation this close to the decision. A lot of money will be made and lost today,” a Deutsche Bank analyst noted.

Recent media reports have contributed to the belief that a larger cut could be in play, suggesting that the Fed may take a more aggressive stance to tackle deeper concerns about economic growth and inflation. A 25-basis-point cut, on the other hand, would signal the Fed’s confidence that inflation is cooling, though without signaling major economic distress.

Strategists Focus on Fed’s Future Plans

Beyond the rate cut itself, market participants are closely watching for any forward guidance from the Fed. Some strategists argue that the communication about the Fed’s future policy direction could have a more profound impact than the immediate rate decision.

Samy Chaar, chief economist at Lombard Odier, emphasized the need for the Fed to reassure markets that they aim to normalize rates by mid-2024. “The worst outcome is a modest 25-basis-point cut with no clear communication, implying that restrictive monetary policy may persist,” Chaar warned.

Defensive Sectors Poised to Outperform

Historically, defensive sectors such as healthcare, consumer staples, and utilities have outperformed in the months following a rate cut. LPL Financial’s analysis shows healthcare stocks rose 14.8% following the Fed’s last rate cut in 1995.

Consumer staples and utilities also delivered gains of 4.9% and 2.4%, respectively. However, technology stocks, which are currently undergoing a significant buildout phase driven by artificial intelligence, may not see the same upside. LPL economists believe that tech may lag behind in the current rate-cut environment.

Market Outlook: Potential for Short-Term Gains in Defensive Stocks

As the Fed prepares to announce its decision, traders should brace for market volatility. A 50-basis-point cut could spark a rally in risk assets, while a smaller 25-basis-point reduction could see defensive stocks outperforming. Investors may want to shift toward healthcare, utilities, and consumer staples in the short term, as these sectors are likely to benefit from a more accommodative monetary policy. However, a lack of clarity from the Fed on future rate cuts could keep broader market gains in check.