US Stocks Face Two Short-Term Threats Amid Fed's Cautious Approach, Warn Analysts

In a recent note, analysts at Morgan Stanley have highlighted two significant risks that could potentially impact the U.S. stock market in the near future.

Analysts Flag Fed Caution, Tariff Risks

The analysts pointed out that the Federal Reserve’s cautious approach to potential interest rate cuts and signs of strain in overnight funding markets are the primary risks facing the equity market, reported Investing.com on Monday.

Uncertainty also remains around the Federal Reserve's interest rate policy, potentially affecting expectations for a more accommodative stance over the next six to twelve months. Analysts added that the Fed's move to pause its balance sheet reduction could have a more significant medium-term effect on financial markets than its present rate trajectory.

They also highlighted that corporate earnings have exceeded forecasts, with per-share income rising 11% in the third quarter — the fastest growth since 2021. This momentum is projected to carry through 2026, broadening earnings contributions across both major and mid-tier indices.

Analysts Michael Wilson and Andrew Pauker said recent corporate earnings reinforce their view that a new market cycle and bull run began in April. However, they warned that despite strong earnings and sales results, tariffs could still weigh on growth in certain sectors in the months ahead.

They also noted that uncertainty over the Federal Reserve's rate policy might challenge expectations for a more accommodative stance over the next six to twelve months.

S&P 500 Rally Spurs Caution And Hopes

The U.S. stock market has been on a remarkable winning streak, with the S&P 500 poised to log its sixth straight month of gains. This streak, however, is raising concerns about the strength of the current bull market and drawing comparisons to previous periods when markets cooled off rapidly.  

This has led to traders eyeing a potential year-end surge, with some even predicting a rally that could see the S&P 500 smash through the 7,000 mark. Over the past year, the S&P 500 index surged nearly 20% to 6,840.20.

Analysts have also warned that the Federal Reserve’s decision to pause its balance sheet reduction may have a more significant medium-term impact on financial markets than its current interest rate path. This shift in liquidity could potentially dampen sentiment, although a gradual recovery may follow as asset purchases resume in line with the banking system’s growth.

Price Action

On a year-to-date basis, the SPDR S&P 500 ETF Trust (NYSE:SPY) and Invesco QQQ Trust ETF (NASDAQ:QQQ), which track the S&P 500 index and Nasdaq 100 index, respectively, climbed 16.66% and 23.29%, respectively, according to Benzinga Pro data.

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Disclaimer: This content was partially produced with the help of AI tools and was reviewed and published by Benzinga editors.