Stocks Surge on Fed’s Rate Cut Forecast and Market Reactions

Stocks experienced a midweek rally following the Federal Open Market Committee’s (FOMC) decision to maintain its forecast for two rate cuts in 2023. The conclusion of the Fed’s two-day policy meeting resulted in no changes to the target policy rate range, an outcome largely anticipated by market participants.

On Wednesday, major indices surged, supported by a decline in treasury yields. Both the S&P 500 and Nasdaq Composite recorded gains exceeding 1%. Earlier in the week, the S&P 500 marked its first consecutive daily gains since the index peaked in February.

The central bank did refresh its outlook regarding inflation and economic growth, acknowledging uncertainties linked to President Trump’s tariff policies. Officials now project core inflation will rise to 2.7% over the next year, up from December’s estimate of 2.5%. Additionally, the Fed revised its forecast for U.S. economic growth downward, predicting GDP growth at just 1.7% compared to previous expectations of 2.1%.

Another significant decision announced was the Fed’s plan to slow the drawdown pace of its balance sheet, a move hinted at in the January meeting minutes. The monthly cap on maturing treasuries that will not be replaced will decrease from $25 billion to $5 billion.

Consumer Discretionary Stocks Rally After Fed Meeting

Market action on Wednesday appeared distinctly bullish. However, this does not suggest a need to aggressively increase stock positions right now. Volatility is expected to remain high, as evidenced by Thursday’s early trading.

Historically, establishing a genuine market bottom during corrections is a gradual process rather than a singular event. It typically takes time for stocks to rise sustainably, urging caution against rushing into trades.

A risk-first mindset is essential, especially during times of market stress and volatility. Managing risk by keeping trades under closer scrutiny is crucial in minimizing potential losses. At pivotal market junctures, beginning with smaller positions can often be advantageous.

On Wednesday, all eleven S&P sectors closed in positive territory, led notably by consumer discretionary stocks. This sector has struggled the most thus far in 2023, and we are now seeing oversold segments of the market attempting a rebound. Notably, the automotive sector stood out as a significant gain contributor on that day.

Tesla Inc. (TSLA) experienced a nearly 5% surge in its stock price, providing relief from recent downward trends. CEO Elon Musk is heavily invested in Full Self-Driving (FSD) technology and robotaxi services, which he refers to as Tesla’s most valuable segments. The company is set to launch unsupervised FSD as a paid service in Austin this coming June.

Further enhancing this positive outlook, Tesla secured initial approval for a ride-hailing permit from the California Public Utilities Commission earlier in the week, marking an important milestone for future service offerings.

Despite these advancing factors, Tesla, currently rated a Zacks Rank #3 (Hold), has relinquished all gains accumulated since the November elections. Day-to-day challenges including increased competition, decreased vehicle sales, and tariff apprehensions create headwinds for the automaker. TSLA shares have declined over 40% year-to-date:

Image Source: StockCharts

General Motors Company (GM) also saw its Stock increase by more than 2% after announcing a partnership with chip manufacturer Nvidia (NVDA). This agreement will enable GM to utilize Nvidia’s GPUs for its advanced driver-assistance systems and for production-related innovations.

With a Zacks Rank #2 (Buy), GM faces favorable earnings forecast revisions, a strong catalyst for driving share prices. Unlike its competitors, GM has fared better in 2023, with its stock shedding only about 6% year-to-date:

Image Source: StockCharts

GM’s shares hold a strong position within Zacks Style Scores, earning an ‘A’ rating in the Value category and an overall ‘A’ VGM score. This suggests GM may experience upward momentum due to a combination of undervaluation and healthy growth prospects, with a forward earnings ratio of just 4.3 times, considerably lower than the industry average.

Bottom Line

With ongoing volatility, it is not an optimal time to adopt an aggressive stance. Patience is key to allowing market trends to stabilize.

We’re observing oversold areas of the market attempting to regain stability at nearby levels, a natural response that could indicate the start of a bottoming process. However, this is not guaranteed. Additionally, we have entered a historically favorable period seasonally, so vigilance for signs of a sustainable reversal is advisable.

Thursday’s trading activity will be indicative. Often, real buying and selling pressures reveal themselves in the day following a Fed announcement. If the market sustains its rally, discretionary stocks should experience benefits. We’ll monitor whether shares like TSLA and GM can build upon their previous gains.

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This article was originally published on Zacks Investment Research (zacks.com).

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The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.