By Zack Mukewa – Managing Director, Capital Markets
The economic impact, investor perception, and strategic positioning for Q3 2024 earnings and beyond
The Federal Reserve’s action to lower interest rates by 50 basis points is a significant development marking the third time in the U.S monetary policy history where the Fed has initiated an easing cycle with such a bold step. Typically, such rate reductions have been linked to notable economic downturns like the bear markets of 2001 and 2007 which resulted in substantial NASDAQ declines over three-year windows. Is 2024 going to be similar with regards to these trends―should we consider a scenario that justifies a more positive perspective?
Historical context and the Federal Reserve’s position
In 2024, the Federal Reserve has faced challenges managing the macroeconomic environment characterized by modest inflation and decelerating labor market growth rates. Aggressively cutting the rates is a proactive measure to sustain and maintain economic stability rather than a reaction to a full-blown crisis―a sharp contrast to the 2001 and 2007 scenarios where the tech bubble burst and the global financial crisis was on the horizon, respectively.
The current state of the economy shows variance; even though inflation has dropped significantly from its 2022 high of 7%, there has been a slowdown in job creation and a decline in job openings―indications that the labor market might be gradually weakening. Fed Chair Jerome Powell is not taking any risks and clearly plans to maintain growth by implementing additional cuts anticipated in the fourth quarter of 2024 and beyond.
Impact of the economy on company operations and borrowing trends
Capital intensive business operations will benefit from the rates cut, allowing them to borrow at lower cost and potentially increase their investments in new ventures and operational enhancements as well as expansions. Financial services, real estate and technology sectors will likely experience immediate impact.
Financial institutions might see borrowing following the rate reduction. However, their profits may be impacted as interest rates, on savings accounts and certificates of deposit decrease. There could be a rise in loan requests for banks. They will have to be cautious, in balancing their interest rates to ensure continued profitability. The housing market might see a bump in activity as mortgage rates drop and become more affordable for buyers previously hindered by higher and prohibitive rates.
In the past, reduction in interest rates has encouraged investment in the technology sector, resulting in Nasdaq record highs leading companies in this sector to utilize cheaper debt for advancing innovation and growth through acquisitions and expansions. The industrial sector could see advantages from reduced expenses that could support investments in infrastructure development and upgrades in manufacturing capabilities and supply chain enhancements. However, with slower global economic growth, the industrials should remain cautious.
Companies with international and cross border will benefit from the decrease in rates due to a likely weaker U.S dollar, which may boost export competitiveness and reduce debt repayment costs.
Investor perceptions after rate cuts
Immediate response has been a bit of mixed bag when it comes down what the Federal Reserve decided. Initially U.S. stocks rallied, with S&P 500 hitting intra-day highs before it eventually dropped indicating investor uncertainty on the economy in the long run. Additionally, Treasury yields also dipped, suggesting that there is an anticipation for continued rate cuts
For retail investors, the primary concerns tend to focus on finding the balance between inflation pressures and economic growth outlook. Historically, reductions in interest rates have steered investments away from government bonds and towards more higher risk equities. For reference, the S&P 500 index gained 86% of the time in the year following the initial interest rate decrease, since 1929. However, it remains uncertain whether this pattern will hold true for 2024 due to vulnerabilities with labor markets and the prevailing economic fragility.
Impact on Q3 2024 earnings season and year-end reporting
As we approach the end of Q3 2024 in a few days, the rate cut introduces complexity to the financial landscape during this earnings cycle―for businesses and markets alike. With borrowing costs and a shifting economic outlook on the horizon; companies are tasked with delicately shaping their narratives to align with these changes. While publicly traded companies may see a boost in their stock prices initially, the focus for long term investors lies in how these companies plan to navigate and thrive in this evolving landscape. Companies may emphasize their capacity to secure funding for growth initiatives while also addressing investor concerns around potential job market fluctuations.
As year-end reporting approaches, industries such as consumer goods and real estate may emphasize how rate cuts make housing and big-ticket purchases more affordable for consumers. In contrast, industrial sectors might focus on investments in operational efficiency. Financial services companies, on the other hand, will need to balance expectations of increased loan demand with concerns about narrowing profit margins in a shifting interest rate landscape.
Electioneering and the rate cut implications
The rate cut also precedes a politically charged environment leading up to the November 2024 presidential election. The current administration has commended the Fed’s move by framing it as proof of the strength and resilience of the U.S economy while keeping inflation in check. Lower interest rates could offer an advantage to the incumbent by alleviating worries about rising costs of living despite a slowdown in job creation. On the other hand, the opponents might suggest that the significant rate reductions indicate hidden economic fragility disguised by temporary inflation relief.
Ultimately the decision made by The Federal Reserve presents a mixed outlook. The reduction in borrowing costs is likely to spur investment and consumer spending; however, the overall state of the economy remains uncertain. Businesses across sectors must be cautious and strategic in leveraging these rates while also navigating the risks associated with a slowing job market and potential global economic challenges. Investors might realize opportunities in equities, but it is crucial to handle investment portfolios prudently especially as political dynamics and corporate earnings reports become focal points in the upcoming weeks and months.
Lambert by LLYC: Your Strategic Partners
At Lambert by LLYC we recognize the implications of making strategic decisions on interest rates, for your company’s operations and market positioning. Our proficiency in investor relations and financial communications guarantees that your messaging is in sync with investor outlook during crucial times like the upcoming Q3 earnings, 2024 year-end reporting and developing a comprehensive investor relations strategy for 2025 and beyond. We are committed to offering the guidance and support required to adapt to these transformations. Whether its developing stories that showcase your company’s growth or ensuring you make an impact in important discussions with investors. Let us assist you in making a mark and taking advantage of opportunities for lasting achievements in the changing business environment of today.