What Fed decision means for markets beyond the near term By Investing.com

Investing.com — The Federal Reserve’s decision to cut interest rates by 50 basis points sparked a strong move in markets, but many are wondering what the long-awaited dovish change means beyond the short-term reaction.

The Fed’s September 19 move was widely anticipated, with the central bank also promising another 50 basis points of cuts before the end of the year. This initially sparked a rally, sending it to new all-time highs before a “selling on the news” reaction pushed markets slightly lower by the end of the day.

In the short term, this accommodative move has left markets in a broadly constructive position. The major risk factors remain potentially negative economic data, but the current economic calendar is light until early October.

Without the threat of significant earnings reports or major economic releases, investors appear to be operating in an environment of “1) Fed easing, 2) slowing but ‘OK’ economic data, and 3) broadly solid earnings,” Sevens said Reported in a recent note.

Cyclical sectors including energy, materials, consumer discretionary and industrials are expected to outperform, while technology could lag in the short term.

However, the long-term implications of the Fed’s decision may be more complex. The key question for investors is whether the Fed acted in time to prevent a broader economic slowdown.

According to the Sevens Report, if rate cuts are timely, they could lead to lower yields, strong earnings growth and positive economic tailwinds. This would likely lead to continued upward momentum for stocks, with the potential for the S&P 500 to hit 6,000.

“I say this with confidence because Fed time tapering would create this macroeconomic outcome: 1) Lower yields, 2) Continued very strong earnings growth, 3) Positive economic tailwinds, 4) Prominent Fed bullish existence, and 5) Expectations of accelerating growth going forward,” the Sevens Report chairman wrote in the note.

On the other hand, if the Fed’s actions were too late to prevent an economic recession, the market could face significant risks.

In such a scenario, the S&P 500 could fall to around 3,675, marking a sharp decline of more than 30% from current levels. This downside risk reflects the market corrections seen in previous recessions, such as those of 2000 and 2007.

As markets digest the Fed’s moves, future economic data will become crucial to determining whether the central bank’s policy has been effective.

More specifically, investors will need to closely monitor future releases to assess whether the Fed has successfully steered the economy out of recession or whether new challenges lie ahead.