A rate cut will be bad news for stocks, JPMorgan warns — and outlines where to invest

Hugh Gimber is a global market strategist for JPMorgan Asset Management. He believes that if the Federal Reserve cuts interest rates next year, it will be bad news to U.S. equity holders. Over the last two years, stocks have rallied multiple times on dovish signals from central banks - in hopes that borrowing costs will be reduced as inflation declines. Gimber, however, believes that Fed cuts in 2020 would coincide with falling corporate earnings and create headwinds for the stock market. "I think that is the most important point to me, is that it is not the case that inflation has simply slid back into target. Gimber said on CNBC's SquawkBox Europe that we are starting to see cracks appearing in the growth forecast. "That is not a positive scenario, especially when you consider what's baked into the earnings numbers." Analysts predict 12% growth in earnings for the S & P 500 overall in 2024. Interest rate markets also price in a probability of more than 55% that interest rates will be cut in July 2024. CME's FedWatch Tool data shows that a further rate cut will be priced in for November of next year. Gimber believes that the two data points contradict each other. You have a disconnect right now: the Fed is expecting to cut multiple times, despite the fact that 12% growth in earnings are expected next year. The strategist explained that both of these things cannot happen simultaneously. Catalyst of a breakdown Gimber says the third quarter earnings season is likely to start showing cracks in growth forecasts, which will lead to lower estimates. He said that as the Q3 earnings season progresses, analysts will begin to sharpen pencils to lower that 2024 estimate. Gimber thinks margins in autos will hold up due to the long backlog of supply shortages.
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Analysts may be tempted to further reduce earnings, according to the JPMorgan strategist. Gimber, given this outlook prefers fixed income to equities at the moment. He highlighted the potential income in bonds with high yields. The 10-year U.S. Treasury rate topped 4,9% on Wednesday, its highest level since 2007. This was due to retail sales that were higher than expected by Dow Jones economists. He recommends that investors focus on more defensive sectors within equities to help them weather a slowing economy. The U.K. is a great example of this higher energy exposure. It has more staples and a more defensive sector. Gimber stated that it's all about the resilience of equities. Gimber also cited local currency debt in selected emerging markets as being attractive. Brazil, Mexico and South Africa, for example, still have some room to reduce rates in comparison to developed markets.