Analysts at Goldman Sachs say it is too early to assess a dovish turn in Fed policy as the economic outlook is not bad enough yet and the rate markets remain too volatile. They added that significant rate fluctuations mean that expectations of higher stock returns over relatively safer assets are likely to be lowered.
Speculation that the Fed's policy would become more equity-friendly has led to the S&P 500 rising from time to time over the past 12 months. But those rallies have all been sold out and the indicator hit new lows each time. The central bank also appears to be on track to fulfill its fourth straight 75 bp rise at its November meeting.
Now, the US stock market is just a few points away from closing at its lowest level since November 2020. It has already fallen 24% this year.
Tighter financial conditions, a potential escalation in geopolitical risks, and the current mix of economic growth and inflation have increased downside risk for the stock.
Meanwhile, 2-year Treasury yields rose to 4.35% on Tuesday, its highest level since 2007. The reason is fears that US inflation data this week will add more incentive for the Fed to keep raising interest rates.
There is also a possible government split in the US midterm elections, but this could lead to stocks performing well after the event as political uncertainty subsides.
