As earnings season approaches and uncertainty around Federal Reserve rate cuts still looms, J.P. Morgan Managing Director & Global Market Strategist David Lebovitz joins Yahoo Finance Live to discuss which factor may play a bigger role in influencing rate cut predictions — FedSpeak or earnings.
Lebovitz believes that both earnings and Fedspeak will contribute to shaping rate cut predictions; however, he emphasizes that it all remains data-dependent. Regarding upcoming inflation reports such as Friday's jobs report, he states that if the data arrive in line with expectations, Fedspeak may "take a back seat" to earnings.
As bond market volatility continues, Lebovitz suggests it is evidence of "persistent uncertainty about what's happening with inflation." However, he adds, if data and FedSpeak can support Fed rate cuts, this could "bring bond volatility lower."
For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.
Editor's note: This article was written by Angel Smith
Video Transcript
MADISON MILLS: Stocks are coming back to life this morning after a rough start to the second quarter early this week with some economic data causing investors to doubt their rate cut views. Fed Chair Jay Powell reversing some of these jitters after he said on Wednesday that he believes inflation is on a, quote, "bumpy path" down to 2%. And he expects to lower rates at, quote, "some point this year." Lots of mad commentary from Jay Powell there. But with earnings season picking back up next week, could we expect company reports to sway market action once again?
Joining us to discuss, we have David Lebovitz, JP Morgan Asset Management Global Market Strategist and Managing Director. David, thank you for being here. I'm curious with the upcoming restart to earnings season. What you're thinking about what's going to be driving the market more throughout this second quarter here? Is it going to be Fed speak like Jay Powell repeating the bumpy road commentary, or is it going to be the fundamentals when it comes to earnings season?
DAVID LEBOVITZ: So I frankly think it's going to be a little bit of both. And we have the employment report coming out this Friday. We have March inflation coming out next week. I think that's very much going to inform Fed speak and Fed messaging in the very short to medium term. I do think, though, that given if those numbers are in line with what we've seen more broadly over the past 12 months, so a deviation from the hotter inflation prints and the robust labor prints that we saw in the first two months of this year, if that gets us a little bit more back on track from an economic perspective, I do think the Fed will signal that and I think Fed speak will subsequently take a back seat to the earnings, which when we think about where equity markets are today, they've gone quite far quite quickly. The majority of the gains have, in fact, been driven by multiple expansion. And so any further upside here is really going to be a function of earnings. And if the Fed keeps on saying what they've been saying, we think that earnings will start to matter a bit more here.
MADISON MILLS: What does that upside look like do you think, David?
DAVID LEBOVITZ: Well, so I think it depends on the way that the macro story plays out, because if we find ourselves in an environment that looks kind of Goldilocksy, so pretty solid growth above trend growth but inflation that continues to decelerate, the S&P 500 could easily test 5,500. If we see a deceleration in growth and a further disinflation, I think that's going to make upside for the S&P a little bit more challenging. It's important to remember that corporate profits are nominal variables. And so if nominal growth is good, that should help the earnings story. But if we see a slowing in nominal growth, either vis a vis softer real activity or further disinflation, that's going to weigh on the profit story and that's probably going to cap where the benchmark can go.
MADISON MILLS: I wonder, too, what your thoughts are on what we're seeing in terms of movement in bonds with regards to equities. Is the bond market the smarter older sibling here? And is there a signal happening there that equities need to be listening to? Or is it just noise?
DAVID LEBOVITZ: So I think that the bond market is the younger sibling that continues to throw tantrums. If you look at implied volatility for the bond market, it's still quite elevated, particularly relative to what we're seeing in equities. And what that really reflects at the end of the day is just this uncertainty, this persistent uncertainty about what's happening with inflation and what that's going to mean for the Federal Reserve.
And so if we get a signal on inflation next week that things are kind of back on track, and we hear from the Fed that they are still expecting to ease policy three times this year, my view is that that will bring bond volatility lower and bonds will begin to behave a little bit more like they have historically instead of the kind of twitchy bond market that we've been dealing with for the better part of the past 18 months.
SEANA SMITH: David, what's your base case on cuts?
DAVID LEBOVITZ: So I think two to three cuts this year is reasonable. I think if the data plays out the way the Fed is expecting it to, which again, given their most recent set of forecasts, does not get us to 2% by the end of this year, I think that they will cut rates three times. If the data doesn't cooperate, it could end up being more like two. But I think that this is a Fed that wants to cut rates. They've said that they want to cut rates and it's really going to take a significant fly in the ointment for them to deviate from that approach.
SEANA SMITH: Let's go with that less likely scenario though that you just laid out. If we only get two cuts for the remainder, for this year, before year end, what's the response do you think going to look like in the equity market? Will we see more pressure?
DAVID LEBOVITZ: So I don't think that the market, the equity market necessarily, cares about when the cuts come. I think that the equity market cares about the fact that the cuts are coming. And so if the Fed signals that, hey, we're going to wait a little bit longer and that's only going to give us the room to cut policy or ease policy two times this year, but we think that we will continue to ease as we move into 2025, I think the equity market will be totally fine with that. I mean, important to recognize that in the most recent summary of economic projections, the way that the Fed was a little bit hawkish was they actually took a rate cut out of their forecast for next year. And that didn't really seem to bother the markets in a significant way. I think the reality here is that 5.25 to 5.5 and a half on Fed funds is indeed restrictive. And what the market wants to see is a Fed that's willing to walk that back a little bit and try to land on a more neutral rate of interest.
MADISON MILLS: David, help us out for nonfarm payrolls tomorrow. What do you think is better news for the market, a bigger number or a weaker number in terms of what that does for the Federal Reserve's moves?
DAVID LEBOVITZ: So we're focused more on the first derivative as opposed to the headline figures. Our expectation is generally aligned with consensus. I think we'll see about 200,000, 215,000 jobs. I think the unemployment rate could indeed edge slightly lower, maybe not all the way back to 3.7 but kind of splitting the difference at 3.8. What we're going to be watching are things like the data on wages, the data on temporary help services, these indicators that give you a better sense of how much pressure is there in the labor market. Is wage growth continuing to cool? Is temporary hiring continue to decelerate? That's going to give us a lot of conviction if that's, in fact, how things play out. That's going to give us a lot of conviction that the labor market is cooling, the path for inflation is in fact lower, and we can continue to expect the Fed to ease policy during the back half of this year. So less focused on the unemployment rate and the payroll figure themselves, more focused on things like wages.
SEANA SMITH: All right, David Lebovitz, great to talk to you here. JP Morgan Asset Management Managing Director of Global Market Strategists. Thanks so much.