USA (Washington Insider Magazine) – The equities strategists at Wells Fargo predict that the US economy will probably escape a recession and continue to grow throughout the upcoming year. The investment bank stated on Monday that this, along with more lenient financial conditions, ought to encourage sustained expansion in business profits and preserve the resilience of the equities markets.
According to Investing, the Federal Reserve last increased the federal funds rate more than a year ago. The policy hiatus has caused stocks to soar, hitting all-time highs. However, recent market turbulence and deteriorating economic statistics have stoked worries that the Fed may have to slash rates sharply to avert a recession in the United States.
Historical Trends and Future Outlook
Historically, the Fed’s decision to ease policy has significantly impacted equity market performance. Since 1974, the average market decline has been about 20% over the 250 days following the Fed’s first rate cut. This average includes several bear markets associated with economic and earnings recessions, which Wells Fargo deems unlikely in 2025.
However, in periods when the Fed has reduced real rates in response to declining inflation, rather than a faltering economy, equities have generally performed well. The S&P 500 has typically continued to rise for 18 months following the first rate cut in such non-recessionary environments. Conversely, when rate cuts coincided with a recession, market performance was often uneven and flat over the same period.
Comparisons to Past Economic Conditions
Wells Fargo analysts are drawing parallels between the current economic climate and 1995, when the Federal Reserve started cutting interest rates during a period of disinflation and economic stabilization. Although the situations differ, the 1995 scenario offers insights into future corporate earnings and stock performance. In 1995, S&P 500 earnings grew by 12% in the year following the initial rate cut, aligning with Wells Fargo’s current forecast.
Future Projections and Market Sentiment
While acknowledging differences between the current and past economic cycles, such as higher inflation rates and prolonged peak rates, Wells Fargo remains optimistic. The strategists believe the U.S. economy will avoid a recession and gradually strengthen through 2025. This expected economic stability, combined with improved financial conditions, should continue to support corporate earnings growth and equity-market strength. They also maintain a favorable outlook on high-quality U.S. large-cap equities.
Recent Market Movements
The S&P 500 ended last week nearly unchanged, recovering most of the losses it experienced on August 5.