With the Federal Reserve rate hike approaching, the S&P 500 may fall by 10%! MRA strategist: There could even be a second wave in December

According to Golden Ten Data APP, Macro Risk Advisors LLC stated that the interest rate hike action the Federal Reserve may initiate as early as this week could trigger a pullback in the S&P 500 index, as falling corporate profit margins will hit earnings prospects while the market is preparing for a tightening cycle.

The S&P 500 index has fallen nearly 1% since September, which has historically been the weakest month of the year. Persistent concerns about high energy costs and recent inflation data have driven the yield on the 10-year US Treasury above 5% for the first time since 2023. This expectation has led traders to almost fully price in a 25 basis point rate hike by Federal Reserve Chair Kevin Walsh on Wednesday, whereas a week ago the probability was about 60%.

Dean Kernutt, founder and CEO of Macro Risk Advisors, said that if the rate hike is implemented on Wednesday, the market will come under greater pressure.

In a report to clients on Monday, he wrote: “We expect the S&P 500 index to pull back by 8% to 10%, and a second round of declines may occur in December.” He stated that a rate hike will “squeeze the profit margins of companies unable to pass on costs,” while also delivering a volatility shock to a market unprepared for it.

Kernutt said that the current market pattern is similar to what investors saw in 2018. At that time, the S&P 500 peaked in September and then plunged by a cumulative 10% in October and November. Kernutt warned that the “Santa Claus rally did not appear” that year, the market experienced another decline in December, and ultimately fell nearly 20% from its peak.

Given this history, Kernutt believes that “adopting a defensive stance at present is the right move.” Similar to 2018, he expects the market to fall again in December in response to the Federal Reserve’s multiple rate hikes in a “K-shaped, low-liquidity economy.”