Why stocks will rise in 2024 with or without a rate cut, according to BofA

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Why stocks will rise in 2024 with or without a rate cut, according to BofA
Bears and bulls alike are keeping a close eye on the Federal Reserve.iStock/Getty Images
  • The stock market will rise in 2024 regardless of what the Federal Reserve does with interest rates.
  • Bank of America said the Fed has already made a lot of progress in taming inflation, and that's why stocks are rising.
  • "As long as the Fed doesn't hike further from here, stocks could remain reasonably well positioned," BofA said.
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The stock market doesn't need interest rate cuts to continue rising in 2024, according to Bank of America equity strategist Savita Subramanian.

Investors appear poised for disappointment as they continue to expect up to five 25-basis point interest rate cuts from the Federal Reserve this year.

But the Fed only anticipates three rate cuts, while an economist said last week that only two rate cuts make sense — and in reality, there could be zero rate cuts if inflation re-accelerates in a meaningful way.

The scenario of no interest rate cuts in 2024 wouldn't necessarily be bad news for the stock market, according to Subramanian, who wrote in a note on Monday that there is still room for upside regardless of what the Fed does this year.

"In our view, as long as the Fed doesn't hike further from here, stocks could remain reasonably well positioned, particularly those with net cash or those with a gearing to higher inflation/nominal GDP growth and tighter employment," Subramanian said.

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The scenario of higher for longer interest rates would bode well for US large-cap companies that hold onto a lot of cash, as they could earn significant interest. About one-third of S&P 500 companies have net cash and stand to benefit from higher cash yields, Subramanian highlighted.

But it's not only companies with a lot of cash on their balance sheet that would benefit from higher for longer interest rates.

"Note that retirees have benefited from higher cash yields and low to middle-income America consumption trends have benefited from a tight labor market," Subramanian said.

So all-in-all if the economy stays solid and the Fed doesn't deliver its highly anticipated interest rate cuts this year, the stock market should still do just fine.

"We remind investors that we expected strong returns this year not because of what the Fed would do in 2024, but because of what the Fed had already accomplished from March 2022 to now," Subramanian said.

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