Investors are navigating a precarious landscape as the Federal Reserve's anticipated interest rate cuts may not provide the boost to risk assets that many are hoping for, according to analysts at BCA Research in a note this week.
The firm said the Fed's easing cycle is shaping up to be a classic "buy the rumor, sell the news" scenario.
In their recent note, the investment research firm points out that global risk assets bottomed in October-November 2022 when investors began to anticipate the end of monetary tightening.
BCA claims this was the "buy the rumor" moment, as markets reacted to the expectation of future rate cuts.
However, they note that the reality is that bond yields reached new highs in October 2023, and the Fed continued to hike rates until July 2023, defying expectations of an early pivot.
BCA Research now expects the Fed to start cutting rates in September, which they believe will mark the "sell the news" moment.
"The Fed is now almost certain to start cutting interest rates in September, which will probably mark the end of risk-on trade in financial markets, i.e., the 'sell the news' moment," writes BCA.
The reasoning is rooted in their forecast of a "rough landing" for the U.S. economy—a scenario where growth is close to zero or slightly negative, leading to a substantial contraction in corporate profits and rising unemployment.
They warn that while a rough landing is not as severe as a hard landing, it will still have negative ramifications for risk assets.
"As in 2001, a U.S. economy flirting with recession will cause corporate profits to contract materially and share prices to decline," BCA Research notes.
BCA concludes: "Investors should stay put on global risk assets, and asset allocators should favor bonds over stocks. We reiterate our underweight in EMcin global equity and credit portfolios."