S&P 500 Index tends to perform well in the run-up to the Fed's first rate cut – NBF

Two-year Treasury yield has dropped below the Fed funds rate. This development is usually supportive for equities though S&P 500 has already made a record annualized gain of 54.5% in just 50 days (since December 15, 2022), economists at the National Bank of Canada report.

A recession could still be avoided

“Whether or not there is a recession in the coming quarters, our research shows that the period between an inversion of the 2-year Treasury yield with the overnight rate and the first Fed rate cut tends to be relatively good for equity markets.”

“The reason why the stock market tends to perform well in the run-up to the Fed's first rate cut is that investors generally embrace a soft landing scenario. Things get more complicated for equity markets once the Fed has pivoted and the collateral damage of previous cumulative tightening is fully reflected in the economy.”

“Although a recession could still be avoided, we remain cautious about increasing our equity exposure after the recent record surge. We still recommend underweighting equities in relative terms and holding excess cash positions.”