Commentary:
The US Fed kept the rate unchanged at 5.25%-5.50%, while upgrading economic forecasts. While the interest rate decision was widely anticipated, revised FOMC projections were a positive surprise for markets. FOMC now expects the US economy to grow by 2.1% in 2024 and by 2.0% in 2025 (up from 1.4% and 1.8%, respectively). With stronger growth, however, a slightly higher inflation is also expected (core PCE inflation projected at 2.6% in 2024). Importantly, the Fed Chair Powell implied that a positive economic performance is unlikely to deter the policymakers from cutting rates. With Fed still expecting three 25bps cuts this year, the view is in line with consensus market expectation. In response to the news, both bond and equity markets rallied during the week, with S&P 500 up by 2.3% and 2-year US Treasury yield down by 12bps to 4.6% (bond yields and prices move in opposite directions).
Looking ahead, investors could benefit from diversifying across sectors, geographies and styles. As tech valuations seem stretched while economic outlook is improving, it sounds reasonable to increase exposure towards value, small-caps, and non-US equities. Moreover, as rates are expected to stay higher for longer, the likely outperformers are quality stocks (i.e., attractively valued companies with steady cash flows, reasonable leverage, and cost-conscious management).
