The S&P 500 is ‘a little bit overcooked’: Strategist

Stocks are coming off a record-setting week after the Federal Reserve initiated a 50-basis-point interest rate cut. Longview Economics founder, CEO, and chief market strategist Chris Watling joins Morning Brief to discuss the rate easing path ahead and how it may impact the market.
“I think the market’s sort of deeply divided. It’s sort of poised in between pricing in a recession and a soft landing. I mean, if you think historically in a soft landing, you would have one, two, or three rate cuts. In a recession, you have 500 basis points of rate cuts. But the market is pricing in a sort of aggregate out to the end of next year, about 250 plus, including the 50 basis points we just had,” Watling tells Yahoo Finance.
He notes that the terminal rate will change as the economy reacts to the rate-easing cycle and the global financial crisis. However, he believes that 2.5% to 3% would be reasonable and argues that the economy can reaccelerate on its own with just a few rate cuts. He adds that the housing rate can also reaccelerate without mortgage rates falling much further. “I think you’ll get a soft landing and probably a pretty good reacceleration,” he explains.
With that scenario in mind, Watling believes that bonds (^FVX, ^TNX, ^TYX) are “pretty overcooked,” and gold (GC=F) “needs a bit of a pause in its rally.” He sees the equity market rotate away from tech into defensive sectors. “But I think over the course of the next few months we’ll start rotating cyclical,” he adds.
As the S&P 500 (^GSPC) has hit record highs this year, Watling views the index at a technically concerning level. “If I look at short-term market timing models, they’re all basically on sale. So I’m a little bit cautious. Sentiment is very toppy. There was a survey out over the weekend that I think family offices are 97% bullish. I mean, you just don’t get more bullish than that really. So you’ve got the same in retail, you’ve got the same across many parts of this market. So everyone’s kind of all in and positive because you’ve got a 50 basis point cut in a sense, and that just makes me nervous in the near term. So I think technically this market’s a little bit overcooked,” he says.
However, in the long-term, Watling sees “a lot of interesting prospects across the global equity market, actually, and particularly outside the US.”
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