‘This could be something more substantial’: Wall Street braces for more Fed rate hikes

Wall Street is reading between the lines and bracing for what it sees as the likelihood of more rate hikes this year.

“This may not be a one or two and done,” Michael Goosay, chief investment officer of global fixed income at Principal Asset Management, told Yahoo Finance.

“This could be something more substantial if they’re truly trying to create demand destruction in order to get inflation under control,” he added.

Investors have priced in more than a 50% chance of another rate hike in October after the Federal Reserve voted unanimously last week to increase rates. Meanwhile, in the Fed’s Summary of Economic Projections, officials project one more rate hike this year.

Goldman Sachs economists on Wednesday said it now expects Fed officials to deliver a second 25 basis point hike next move, in “a change from our previous expectation that September would be the only hike.”

The economists added, “The meeting was more hawkish than we expected,” pointing to the unanimous vote and Fed Chairman Kevin Warsh’s description of the hike as having “removed a dose of accommodation.”

Veteran strategist Ed Yardeni, meanwhile, cut his year-end S&P 500 (^GSPC) price target from 8,400 to 7,900 last week, anticipating more than one rate hike this year.

“The risk is that higher-for-longer oil prices continue to push bond yields higher,” Yardeni wrote, suggesting the Fed’s hike will be the beginning of a rate-hiking cycle.

“The longer oil prices remain elevated, the greater the risk that inflation becomes entrenched, especially given the economy’s resilience,” he said.

Bank of America equity strategist Savita Subramanian forsees a better entry point for the S&P 500, noting that “we are entering a seasonally weak period and in our view are overdue for a pullback.”

The firm, which forecasts three rate hikes this year, nudged up its year-end price target to 7,400, suggesting about a 3% decrease from current levels.

Wall Street strategists point out the broad-based index’s strength against a backdrop of several drawbacks, including bond yields, higher oil prices, and a strong dollar.

“If we get some of those things starting to ease, and you still have the earnings power that we’ve got. Like, we are really excited for the fourth quarter to come in here,” Horizon chief investment officer Scott Ladner told Yahoo Finance.

Ladner said investors should watch for “the second leg of an AI capex trickle-down effect,” such as infrastructure-related companies that could benefit in the fourth quarter.

In an environment of higher rates, Jordan Jackson, JPMorgan Asset Management global market strategist, advises “embracing a healthy split between both growth and value names.”

He also favors large-cap stocks over small caps, which are more sensitive to higher interest rates.