Leuthold Group's chief investment officer warns of "rate cut trap" stock market may face a "sell the news" market.

With the market widely expecting the Fed to announce a rate cut this week, investors hope this move will boost the US economy and stock market. However, Doug Ramsey, Chief Investment Officer of Leuthold Group, warns that this shift in policy may have unexpected consequences and could even exacerbate market volatility. In an interview, he pointed out that while investors almost see the rate cut as a done deal, its actual stimulative effect on the economy may be limited. He believes that the rate cut may not effectively drive a manufacturing recovery or unfreeze the stagnant real estate market since the rate hike in 2022. Instead, long-term Treasury yields may rise after the rate cut, as inflation pressures may pick up again, ultimately leading to the rate cut having the opposite effect. Ramsey emphasized, "The intent of the rate cut is to stimulate weak sectors, but in some cases, the result may be to boost already strong inflation." Ramsey compared the current situation to the period in 2007 when the Fed first cut rates. In September 2007, the Fed started cutting rates when the real estate market had been declining since its peak in 2005, the labor market was weak, and inflation was higher than the central bank's target. Policymakers hoped the rate cut would stimulate the real estate and job markets, but the result was the opposite - real estate and labor markets continued to deteriorate while inflation unexpectedly rose. While Ramsey does not believe the current market will repeat the 2008 financial crisis, he warns that a resurgence in inflation still poses a significant challenge. Especially since the pandemic, low-income consumers have been under pressure due to significant price increases. If inflation rises again, it will not only further squeeze household budgets but may also hinder new business investments, ultimately affecting corporate profits and stock market performance. Recent data has shown early signs: the price sub-index in the Purchasing Managers' Index (PMI) is rising, while new orders are stagnating. Historical experience shows that when prices rise and new orders do not grow, the stock market often weakens. Although the S&P 500 and NASDAQ indices are currently at record highs, this divergence may pose a risk. Jonathan Krinsky, Chief Market Technician at BTIG, warns that if the Fed announces a rate cut as expected this week, the market may see a "sell-the-news" scenario, where investors take profits after the event, triggering the biggest decline since April. At the close on Monday, the S&P 500 rose by 0.47%, the NASDAQ rose by 0.94%, both hitting historic highs again; the Dow Jones Industrial Average rose by 0.11%. Ramsey points out that the forward P/E ratio of the S&P 500 is currently at a historical high, a level never seen within a Fed rate cut cycle. Leuthold Group predicts that the US Consumer Price Index (CPI) year-on-year growth rate will rise to 3.5% by the end of 2025. Ramsey said, "If inflation rises to 3.3% or 3.4% and the Fed signals tolerance, the stock market is unlikely to not be impacted." While Wall Street has seen continuous upward revisions in corporate profit expectations over the past three months, providing some support to the market, any change in inflation or policy expectations could become the spark for a market correction in the context of high valuations.