LPL Market Signals: What Does the Fed Say?

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Economic  Blog

Friday, June 25, 2021

What does the Fed say?

Stocks were making new highs—then Federal Reserve Chair Jerome Powell and the Federal Reserve (Fed) had the latest Federal Open Market Committee (FOMC) meeting—and things changed. Stocks sold off hard after it was determined the Fed was more hawkish than expected. This week in the LPL Market Signals podcast, Chief Market Strategist Ryan Detrick and Equity Strategist Jeff Buchbinder discuss why a more hawkish Fed shouldn’t have been much of a surprise. They also discuss the sharp earnings revisions higher and why LPL Research downgraded technology.

The Fed upsets the apple cart

The stock market sold off hard after the Fed decision came in hawkish. Ryan and Jeff discuss how the Fed’s position shouldn’t have been a surprise. Jeff points out that the Fed is really just back in line with what the market was expecting. Ryan details how inflation data had exploded higher and that many inflation indicators actually have peaked—plus, higher rate hikes usually are a sign of an improving economy and things getting back to normal. Ryan and Jeff are not ignoring the fact that the Fed moves markets—they recognize how the Fed, by taking away the punch bowl sooner, could impact markets. However, they maintain that what the Fed did last week was not that much of a surprise.

Earnings estimates increase

Earnings drive long-term stock gains and one thing we’ve seen this year is huge jumps to earnings estimates. Earnings growth in the United States has jumped from 18% to 35%, helping to justify stocks at such high levels. Emerging markets haven’t increased quite as much, but as Jeff shows, more was expected of them at the start of the year. The big surprise, though, has been developed international—jumping from 19% to 38%. This is one of the primary reasons we’ve grown more optimistic about this group after lagging for many years (or even decades).

Tech downgrade

It was a tough call, as we’ve been big tech bulls for many years, but Jeff gives more than a few reasons for this downgrade:

  • The reopening favors early cycle and cyclicals
  • Valuations are still quite pricey for tech
  • Tech’s relative trend has been neutral

The flipside is that the fundamentals are still quite strong, and this is why we only moved to neutral on the downgrade.

You can watch the full video below and directly on our YouTube channel. Please be sure to subscribe to the LPL Research YouTube channel so you don’t miss anything! Also, if you like our channel, please give us a positive review—it helps more than you know!

 

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