JPMorgan warns expected Fed rate cut could lead to stock market decline
2025-09-09 22:58:25
Market expectations for looser monetary policy from the Federal Reserve have continued to rise since Federal Reserve Chairman Powell stated at the Jackson Hole symposium in August 2025 that an interest rate cut might be "reasonable." Investors generally predict that the Fed will announce a 25 basis point rate cut on September 17, with multiple further rate cuts expected in 2025 and 2026.
This expectation has driven the S&P 500 index up nearly 2% over the past month, bringing its total gain for the year to over 10%. Despite the multiple challenges facing the stock market this year, including geopolitical tensions, trade tensions, and volatile economic data, the expectation of a rate cut is still seen as a key driver of the market. Many investors believe that lower borrowing costs will stimulate business investment and consumer spending, further fueling stock market gains.
However, JPMorgan Chase's trading team (led by Andrew Taylor) warned that the September 17th rate cut might not be the panacea the market had hoped for, but instead could trigger a "sell-the-news" effect, leading to a short-term decline in the stock market. This counterintuitive prediction has attracted widespread attention and prompted investors to re-examine the potential impact of rate cuts on the stock market.
JPMorgan Chase's warning
JPMorgan's trading team analyzed several risk factors that could lead to a stock market decline, covering macroeconomic factors, policy uncertainty, and market dynamics:
Macroeconomic concerns : With the current labor market tightening, interest rate cuts could further stimulate business demand for labor, pushing up wages and leading to "sticky" inflation (i.e., persistent inflationary pressure). Meanwhile, comments from businesses and the public suggest that rising supply chain costs due to tariffs are being passed on to consumers, potentially exacerbating inflation expectations.
Upcoming Consumer Price Index (CPI) data is expected to show inflation stabilizing around 3%, but core inflation (excluding food and energy) is stickier due to wage growth. UBS Chief Economist Jonathan Pincus noted that the August nonfarm payroll report showed a slowdown in job creation to 142,000, but average hourly earnings grew 4.1% year-over-year, exceeding the Federal Reserve's 2% inflation target. This wage pressure could mitigate the impact of rate cuts on the stock market, as investors worry that the Fed may need to maintain higher interest rates for longer to curb inflation.
Uncertainty about the Fed's reaction function : The so-called "reaction function" refers to how the Fed adjusts monetary policy based on economic data (such as inflation, employment, and economic growth). Currently, the market is concerned about the Fed's balance between supporting the job market and controlling inflation. If the Fed focuses too much on employment and tolerates higher inflation, investors may worry about future policy tightening.
The Fed is increasingly divided over the pace of rate cuts, with hawks like Cleveland Fed President Loretta Mester warning that too rapid rate cuts could lead to a rebound in inflation, while doves like San Francisco Fed President Mary Daly emphasize that a weak job market warrants easier policy.
Ellen Zentner, chief U.S. economist at Morgan Stanley, predicts that the Federal Reserve may adopt a "gradual" approach to rate cuts (25 basis points rather than 50 basis points) to avoid overly optimistic market expectations of loose policy. This cautious pace could lead investors to take profits after the rate cuts are implemented, exacerbating the risk of "selling the facts."
Overheated Market Positioning : JPMorgan Chase noted that US stock market positioning is currently "above average but declining." Hedge funds have begun to slightly reduce their holdings in North American and Asia-Pacific markets, indicating that market participants' confidence has wavered. Citigroup strategists also pointed out in their latest report that US stock market momentum is weakening, partly due to investors adjusting their positions to avoid risks ahead of interest rate cuts.
Slowing corporate buybacks : In the first half of 2025, S&P 500 companies hit a record high in stock buybacks, providing significant support for the market. However, a recent report from Goldman Sachs indicates that corporate buyback activity has slowed significantly recently, partly due to tech giants shifting funds toward investments in areas such as AI and cloud computing. This weakening of buyback activity could weaken the market's resilience to selling pressure.
Goldman Sachs data shows that stock buybacks by S&P 500 companies fell 10% year-over-year in the second quarter of 2025, primarily due to tech giants like Apple and Microsoft prioritizing investments in AI, cloud computing, and data center development over stock buybacks. This shift in capital flows weakens a key supportive factor for the market, particularly during periods of heightened volatility. Analysts believe that if corporate buybacks continue to slow, the S&P 500 index could become more vulnerable to external shocks.
Declining retail investor participation : Retail investors have been a significant force in "buying the dip" through 2025, driving multiple market rallies. However, Citadel Securities strategist Scott Rubner noted that retail trading volume through the options market typically declines seasonally in September before recovering in the fourth quarter. This temporary decline in participation could make the market more vulnerable to short-term sell-offs.
Retail investor enthusiasm weakened significantly in early September, partly due to seasonal factors and a wait-and-see attitude toward upcoming economic data releases. Barclays strategist Vineet Samra noted that retail options trading volume through platforms like Robinhood fell by approximately 15%, reflecting weakening market momentum. Furthermore, institutional investors began to reduce their risk exposure, with some hedge funds reducing their holdings in technology and consumer goods sectors, potentially amplifying the market sell-off following the rate cut.
Market Outlook
Despite warning of short-term sell-off risks, JPMorgan's trading team maintains a "low-confidence tactical bullish" view on the stock market, believing the current bull market has strong momentum and that a short-term correction won't necessarily alter the long-term upward trend. Artificial intelligence (AI) is considered a key driver of the future market, particularly with the potential expansion of the "Magnificent Seven" to include Broadcom (AVGO), which has attracted significant attention due to its recent strong earnings report.
Both JPMorgan Chase and Goldman Sachs recommend investors increase their exposure to gold (GC00) amid expectations of rate cuts, as the US dollar index (DXY) could weaken due to easing policies, boosting gold's appeal as a safe-haven asset. Goldman Sachs projects the S&P 500 index has approximately 2% upside potential through 2025, but recommends diversifying risk through investments such as gold mining stocks to mitigate potential market volatility. Overall, despite short-term risks, the long-term bullish outlook remains based on technological innovation and easing policies.
Natasha Caneva, global head of commodities research at JPMorgan, said that gold's appeal as a safe-haven asset is increasing, especially against the backdrop of geopolitical uncertainties (such as the French government crisis) and a weak dollar. She predicts that if the Federal Reserve confirms its path to rate cuts, gold prices could rise further to $3,800 an ounce.
Summarize
JPMorgan Chase's warning is based on multiple risk factors, including wage-induced inflationary pressures, ambiguity in Federal Reserve policy, overheated market positioning, a slowdown in corporate buybacks, and a seasonal decline in retail investor participation. Recent reports have further reinforced these concerns: labor market data and inflation expectations could undermine the positive impact of rate cuts, while weakening retail investor momentum and declining corporate buybacks could make the market more vulnerable to a sell-off.
Despite this, AI and gold investments are still seen as potential opportunities, providing investors with a way to diversify their risks. Investors should closely monitor the Federal Reserve meeting on September 17 and subsequent economic data to more accurately judge market trends and adjust their investment strategies.
This expectation has driven the S&P 500 index up nearly 2% over the past month, bringing its total gain for the year to over 10%. Despite the multiple challenges facing the stock market this year, including geopolitical tensions, trade tensions, and volatile economic data, the expectation of a rate cut is still seen as a key driver of the market. Many investors believe that lower borrowing costs will stimulate business investment and consumer spending, further fueling stock market gains.
However, JPMorgan Chase's trading team (led by Andrew Taylor) warned that the September 17th rate cut might not be the panacea the market had hoped for, but instead could trigger a "sell-the-news" effect, leading to a short-term decline in the stock market. This counterintuitive prediction has attracted widespread attention and prompted investors to re-examine the potential impact of rate cuts on the stock market.
JPMorgan Chase's warning
JPMorgan's trading team analyzed several risk factors that could lead to a stock market decline, covering macroeconomic factors, policy uncertainty, and market dynamics:
Macroeconomic concerns : With the current labor market tightening, interest rate cuts could further stimulate business demand for labor, pushing up wages and leading to "sticky" inflation (i.e., persistent inflationary pressure). Meanwhile, comments from businesses and the public suggest that rising supply chain costs due to tariffs are being passed on to consumers, potentially exacerbating inflation expectations.
Upcoming Consumer Price Index (CPI) data is expected to show inflation stabilizing around 3%, but core inflation (excluding food and energy) is stickier due to wage growth. UBS Chief Economist Jonathan Pincus noted that the August nonfarm payroll report showed a slowdown in job creation to 142,000, but average hourly earnings grew 4.1% year-over-year, exceeding the Federal Reserve's 2% inflation target. This wage pressure could mitigate the impact of rate cuts on the stock market, as investors worry that the Fed may need to maintain higher interest rates for longer to curb inflation.
Uncertainty about the Fed's reaction function : The so-called "reaction function" refers to how the Fed adjusts monetary policy based on economic data (such as inflation, employment, and economic growth). Currently, the market is concerned about the Fed's balance between supporting the job market and controlling inflation. If the Fed focuses too much on employment and tolerates higher inflation, investors may worry about future policy tightening.
The Fed is increasingly divided over the pace of rate cuts, with hawks like Cleveland Fed President Loretta Mester warning that too rapid rate cuts could lead to a rebound in inflation, while doves like San Francisco Fed President Mary Daly emphasize that a weak job market warrants easier policy.
Ellen Zentner, chief U.S. economist at Morgan Stanley, predicts that the Federal Reserve may adopt a "gradual" approach to rate cuts (25 basis points rather than 50 basis points) to avoid overly optimistic market expectations of loose policy. This cautious pace could lead investors to take profits after the rate cuts are implemented, exacerbating the risk of "selling the facts."
Overheated Market Positioning : JPMorgan Chase noted that US stock market positioning is currently "above average but declining." Hedge funds have begun to slightly reduce their holdings in North American and Asia-Pacific markets, indicating that market participants' confidence has wavered. Citigroup strategists also pointed out in their latest report that US stock market momentum is weakening, partly due to investors adjusting their positions to avoid risks ahead of interest rate cuts.
Slowing corporate buybacks : In the first half of 2025, S&P 500 companies hit a record high in stock buybacks, providing significant support for the market. However, a recent report from Goldman Sachs indicates that corporate buyback activity has slowed significantly recently, partly due to tech giants shifting funds toward investments in areas such as AI and cloud computing. This weakening of buyback activity could weaken the market's resilience to selling pressure.
Goldman Sachs data shows that stock buybacks by S&P 500 companies fell 10% year-over-year in the second quarter of 2025, primarily due to tech giants like Apple and Microsoft prioritizing investments in AI, cloud computing, and data center development over stock buybacks. This shift in capital flows weakens a key supportive factor for the market, particularly during periods of heightened volatility. Analysts believe that if corporate buybacks continue to slow, the S&P 500 index could become more vulnerable to external shocks.
Declining retail investor participation : Retail investors have been a significant force in "buying the dip" through 2025, driving multiple market rallies. However, Citadel Securities strategist Scott Rubner noted that retail trading volume through the options market typically declines seasonally in September before recovering in the fourth quarter. This temporary decline in participation could make the market more vulnerable to short-term sell-offs.
Retail investor enthusiasm weakened significantly in early September, partly due to seasonal factors and a wait-and-see attitude toward upcoming economic data releases. Barclays strategist Vineet Samra noted that retail options trading volume through platforms like Robinhood fell by approximately 15%, reflecting weakening market momentum. Furthermore, institutional investors began to reduce their risk exposure, with some hedge funds reducing their holdings in technology and consumer goods sectors, potentially amplifying the market sell-off following the rate cut.
Market Outlook
Despite warning of short-term sell-off risks, JPMorgan's trading team maintains a "low-confidence tactical bullish" view on the stock market, believing the current bull market has strong momentum and that a short-term correction won't necessarily alter the long-term upward trend. Artificial intelligence (AI) is considered a key driver of the future market, particularly with the potential expansion of the "Magnificent Seven" to include Broadcom (AVGO), which has attracted significant attention due to its recent strong earnings report.
Both JPMorgan Chase and Goldman Sachs recommend investors increase their exposure to gold (GC00) amid expectations of rate cuts, as the US dollar index (DXY) could weaken due to easing policies, boosting gold's appeal as a safe-haven asset. Goldman Sachs projects the S&P 500 index has approximately 2% upside potential through 2025, but recommends diversifying risk through investments such as gold mining stocks to mitigate potential market volatility. Overall, despite short-term risks, the long-term bullish outlook remains based on technological innovation and easing policies.
Natasha Caneva, global head of commodities research at JPMorgan, said that gold's appeal as a safe-haven asset is increasing, especially against the backdrop of geopolitical uncertainties (such as the French government crisis) and a weak dollar. She predicts that if the Federal Reserve confirms its path to rate cuts, gold prices could rise further to $3,800 an ounce.
Summarize
JPMorgan Chase's warning is based on multiple risk factors, including wage-induced inflationary pressures, ambiguity in Federal Reserve policy, overheated market positioning, a slowdown in corporate buybacks, and a seasonal decline in retail investor participation. Recent reports have further reinforced these concerns: labor market data and inflation expectations could undermine the positive impact of rate cuts, while weakening retail investor momentum and declining corporate buybacks could make the market more vulnerable to a sell-off.
Despite this, AI and gold investments are still seen as potential opportunities, providing investors with a way to diversify their risks. Investors should closely monitor the Federal Reserve meeting on September 17 and subsequent economic data to more accurately judge market trends and adjust their investment strategies.
- Risk Warning and Disclaimer
- The market involves risk, and trading may not be suitable for all investors. This article is for reference only and does not constitute personal investment advice, nor does it take into account certain users’ specific investment objectives, financial situation, or other needs. Any investment decisions made based on this information are at your own risk.
