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Adjustment period

This week starts with the S&P500 at all time highs and certain optimism about earnings, where 20% of the companies in the index will report earnings. On the macro front, the 4Q23 gdp will be published when the consensus is 2%. On the monetary policy front, the market keeps adjusting its expectations to the Fed dot plot. It has gone from discounting 7 rate cuts for the year, to now foreseeing 5 cuts. As you can see the probability of a rate cut in January is close to zero, and both the March and May probability lines have taken a nose dive. This change should make stocks less attractive, not more, and yet investors keep pushing stocks up. It’s important to point out that the FOMC meeting next week will set the tone for the year, and should cause some repricing, but the one where the action should be is the one in March: The #btfp matures (likely to be extended), and if the Fed doesn’t cut, it will be difficult to see 5 cuts during the year. More expectations adjustment ahead.

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Chart source: Bianco Research

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