A Warning from Hugh Gimber, Global Market Strategist at JPMorgan Asset Management

According to Hugh Gimber, global market strategist at JPMorgan Asset Management, a cut in interest rates by the Federal Reserve next year is likely to have a negative impact on U.S. equity investors.

Over the past two years, stocks have typically experienced rallies whenever central bankers hinted at a more dovish stance, as investors hoped for lower borrowing costs amid falling inflation. However, Gimber believes that a Fed rate cut in 2024 would coincide with a decline in corporate earnings, creating headwinds for stocks.

“I think the key point for me is that the reason the Fed cuts next year is not because inflation has just smoothly glided back to target. Rather, it’s because we start to see cracks in the growth outlook,” stated Gimber in an interview with AsumeTech’s “Squawk Box Europe.” “And that is clearly not a very positive scenario for equities, particularly when you think about what is baked into earnings numbers.”

The Contradicting Data Points

Analysts are predicting a 12% earnings growth for the S & P 500 as a whole in 2024. However, interest rate markets are pricing in more than a 55% probability of a rate cut in July 2024, with a further rate cut being expected by November of that year, according to data from CME’s FedWatch Tool. Gimber believes these two data points contradict each other.

“You have this disconnect at the moment: 12% earnings growth expected for next year and still the Fed expected to cut multiple times. Those things can’t both happen at the same time,” warns the strategist.

The Catalyst for a Breakdown in Stocks

Gimber predicts that the upcoming third-quarter earnings season will bring to light cracks in the growth outlook, leading to lower forecasts. He anticipates that analysts will revise down their 2024 earnings figures.

While certain sectors like autos may have robust margins thanks to a backlog and supply constraints, industrial sectors like chemicals are already showing weakness, indicating further potential markdowns in earnings.

Where to Invest

Given this outlook, Gimber advises investors to consider fixed income options over equities. He highlights the income potential in bonds with record-high yields, pointing out that the 10-year U.S. Treasury yield reached its highest level since 2007, topping 4.9%.

Within equities, Gimber suggests focusing on more defensive sectors that can withstand slowing growth. He cites the U.K. as an example with higher energy exposure and characteristics of defensive sectors. Additionally, he finds selective emerging market local currency debt attractive, especially in countries like Brazil, Mexico, and South Africa, which still have room to cut rates compared to developed markets.