With all eyes on the Federal Reserve’s policy decision, Wells Fargo warned that any aggressive comment from Chairman Jerome Powell could worsen a sell-off in US stocks.
US central bankers are expected to raise interest rates on Wednesday, while signalling a slower approach to a gradual tightening in 2019. Should they turn out to be more hawkish than anticipated, the S&P 500 could fall as much as 5% by year-end, according to Chris Harvey, head of equity strategy at Wells Fargo.
"If the Fed is one and done or on an extended break, we would expect equities to firm and move higher," Harvey wrote in a note to clients. "If the Fed says steady as she goes, we would expect sentiment to break."
The S&P 500 has tumbled 12% from its September peak as investors fled risky assets amid mounting concerns over US-China trade tensions, higher interest rates and a possible economic recession. Down over the last three, six and 12 months, the index represents a rare market backdrop for Fed policy makers, one that has accompanied just two of 76 rate increases since 1980.
President Donald Trump has urged the central bank to stop raising rates, saying further tightening will hurt market liquidity. But a Fed that’s too dovish can also weigh on sentiment, as that would reinforce investor fears over an economic slowdown, according to Mike Wilson, the chief US equity strategist at Morgan Stanley.
"If the Fed does turn out to be more dovish than expected there is a good chance it is because the data is forcing them to be," Wilson wrote in a note on Monday. "That environment would not be good for equities."