Wells Fargo: With Fed expected to cut 175 bps through 2025, buy the dip in stocks

Wells Fargo strategists expect the Federal Reserve to cut interest rates by 175 basis points (bps) by the end of 2025, creating an economic landscape that could present buying opportunities in the stock market.

Following a sharp rally in the S&P 500 index (SPX), equity valuations became stretched and a pullback was overdue, said Scott Wren, Wells Fargo’s Senior Global Market Strategist.

Wrenn said Wells Fargo deliberately refrained from chasing equity markets higher, citing concerns over high valuations and an expectation that the economy may continue to slow in the coming quarters. He pointed to potential weaknesses in the labor market and emerging headwinds for consumer spending in the near to intermediate term.

"Our analysis suggested investors were too optimistic as the SPX was notching new record highs," he said.

However, Wells Fargo maintained that, based on their economic outlook through the end of 2025, market downturns in the SPX could generate buying opportunities.

Such an opportunity arose in recent weeks, as concerns over a weaker employment report and a soft manufacturing reading sparked fears that the Federal Reserve had fallen behind in cutting interest rates.

The SPX saw an intraday low, marking nearly a 10% correction from its highs over the next two trading days. This prompted some in the financial media and other analysts to call for an "emergency" Fed meeting to cut rates immediately.

While Wrenn dismissed the idea of an emergency rate reduction, he does anticipate the Fed will reduce rates by a total of 100 basis points (bps) by the end of the year, starting with a 50 bps cut at the September policy meeting. He also expects an additional 75 bps of cuts in 2025.

"We believe this magnitude of fed funds rate reductions will lead to improved economic performance as we move through next year. Thus, as stated, we see market corrections as buying opportunities," the strategist stated.

Regarding the recent market volatility, Wrenn believes investors should reallocate their funds from short-term fixed income and long-term fixed income into large-cap and small-cap equities.

Wrenn continues to favor large caps over small caps and domestic equities over international markets.