S&P 500, Nasdaq continue to rally; analysts discuss what's next post-FOMC

By Senad Karaahmetovic 

As expected, the U.S. Federal Reserve increased its benchmark interest rate by 25 basis points at its first meeting of the year. By delivering a 25bps hike, the Fed slowed the pace of rate hikes after it hiked by 50bps in December and by 75bps at each of its previous four meetings.

Still, stocks rallied in the aftermath of the FOMC as Fed Chair Powell said that the central bank is seeing signs of falling inflation.

"We can now say, I think for the first time, that the disinflationary process has started," Mr. Powell said at a press conference following the central bank's meeting.

Although Powell also said that monetary policy is still not "sufficiently restrictive," markets heard enough to go into a risk-on setup, allowing tech stocks to lead the charge. Better-than-feared results from Meta Platforms (NASDAQ:META) also fueled a strong rally in stocks.

The S&P 500 closed about 1% higher while the Nasdaq Composite Index jumped 2%. Dow Jones gained less than 0.1%. The rally in stocks has continued in pre-market Thursday with Nasdaq futures up almost 1.5%.

The focus now shifts back to the earnings season with tech behemoths Apple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN), and Google (NASDAQ:GOOGL) set to report results today after market close.

What are analysts saying?

Here is how top Wall Street equity strategists saw the FOMC statement and Powell's remarks.

Vital Knowledge strategists: "The 2/1 decision was the opposite of the 12/14 one in that a hawkish statement was followed by a relatively dovish press conf. (back in 12/14 a dovish statement came before a hawkish press conf.). We thought two parts of the press conf. were particularly notable: 1) Powell's disinflation language ("we can say the disinflation process has started", something that's "welcome, encouraging, and gratifying") and 2) the fact Powell did NOT admonish markets for easing financial conditions in the last few weeks."

Wolfe strategists: "We thought Fed Chair Powell's tone was going be more hawkish than expected. We were dead wrong!... While he also said it's unlikely that it will be appropriate to cut rates this year, the market will continue to NOT believe him!... Powell's very dovish messaging is very likely to push U.S. equity markets higher over the near term. Essentially, the market tested Powell, and he caved!"

Citi strategists: "Markets read the meeting as dovish but we saw it as closer to neutral with Powell signaling softer core inflation has not changed the Fed base case for two more 25bp rate hikes. We continue to think inflation data will come in stronger and expect three further 25bp hikes."

Morgan Stanley strategists: "The disinflationary process is underway and combined with a weaker labor market, we expect the Fed to pause… We expect downward revision to the Committee's median forecast for core PCE, which would create room for downward adjustment in the dot plot as well."

Deutsche Bank strategists: "Although Chair Powell did not explicitly reaffirm the December dot plot, we interpreted his overall commentary – including reference to "a couple" more rate hikes and the need to see "substantially more evidence to be confident that inflation is on a sustained downward path" – as signaling a 5.1% terminal rate remains the Committee's base case."

HSBC strategists: "Our own forecast is that the FOMC will only follow through with one more 25bp rate hike, with risks still skewed towards the upside… With the February Fed event risk now gone, it might be tempting to go all-in on equities and other risk assets now. But beware – the potentially bigger hawk, the ECB, is lurking just around the corner."

Wells Fargo strategists: "We look for the FOMC to hike the fed funds target rate by 25 bps each at its next two policy meetings. That said, we do not have a high level of conviction regarding the exact amount of tightening that the Committee will need to deliver… We have a higher degree of conviction around our belief that policy will need to remain restrictive for quite some time to bring inflation back to 2%. We forecast that the FOMC will not begin easing policy until early 2024."

Goldman Sachs strategists: "We took the overall message from today's meeting as consistent with our forecast of two more 25bp hikes in March and May. Our forecast of a peak funds rate of 5-5.25% remains slightly more hawkish than market pricing, which fell 3bp today to 4.93%."