Why this strategist wants the Fed to move slower

The Consumer Price Index (CPI) report has shaken markets, with the March reading coming in hotter-than-expected at 3.8% versus the estimated 3.7%. This has sent stock futures (NQ=F, YM=F, ES=F) falling as investors grapple with the implications for Federal Reserve monetary policy. Wells Fargo Head of Equity Strategy Chris Harvey joins the Morning Brief to discuss his outlook.

Despite futures declining on the back of the CPI print, Harvey believes the Fed will take a more gradual approach to rate cuts, which he sees as a positive. In his assessment, "the market is a momentum growth large-cap market" that can only move higher from here, supporting his decision to raise his S&P 500 (^GSPC) target.

Harvey notes that this report solidifies the expectation of the Fed embarking on a "multiyear easing cycle." While he acknowledges that "the economy is better-than-expected, but it's not very strong," Harvey advises investors to maintain a "balanced approach" to their portfolios, adding both growth stocks and defensive positions "for days like today."

Looking ahead, Harvey suggests that with earnings season underway, there could be a slight upside in the market, but he cautions investors not to "expect fireworks" anytime soon, given the volatility he anticipates.

For more expert insight and the latest market action, click here to watch this full episode of Morning Brief.

Editor's note: This article was written by Angel Smith

Video transcript

SEANA SMITH: Well, futures well they are sinking of the heels of that hotter than expected CPI print. The move lower coming as investors adjust and recalculate their expectations for Fed rate cuts. And the move lower today. it's coming on the heels what the market has really posted as a strong start to the year, continuing some of the gains that we saw last year.

You got the S&P, at least, year-to-date, up just about 9% ahead of today's open. Despite the uncertainty surrounding the Fed and rate cut outlook, our next guest saying that he thinks that the S&P 500 has more room to run. He has the highest year-end S&P target on the street.

We want to bring in Chris Harvey joining us here on set. Wells Fargo head of equity strategy. It's great to have you on set, especially, on a day like today. So before we dive into your year-end target, just your quick reaction to this print and what this means for equities, at least, in the near term.

CHRIS HARVEY: So, obviously, it's a pretty ugly reaction. But here's the takeaway. If you look at futures, what's down the most? Small caps are down the most. And for us, this is a perverse statement. We actually want the Fed to go slower. Because if the Fed goes slower, that keeps the status quo in place.

The market is a momentum growth, large cap market. It wants the status quo. And we can work higher from here. We never thought the Fed was going to go in the first half. But the big and the important thing is that the Fed's going to start a multi-year easing cycle.

We can argue about when and how much and so on and so forth. But it's the fact that it's a multi-year easing cycle. If you go back to '21 and '22, '21 was a great year. We had a lot of accommodation. Actually, too much accommodation. But it ran into a buzzsaw in '22, because the Fed got very aggressive.

You're not going to see that in the future. And I think that's the key takeaway.

BRAD SMITH: What's the multi-year easing cycle playbook then? As of right now, sure, there's the pause, I guess, we can consider. But then there's got to be a pivot. And portfolios have to adjust as well in tandem.

CHRIS HARVEY: For now, what we're saying is, it's a growth market. We think it's going to continue to be a growth market. This whole belief that growth is suddenly going to explode. Not true. The economy is better than expected. But it's not very strong.

So I think what you want to do going forward is you want to have a balanced approach. You want to have some growth in it. On a sector basis, we're telling people to be overweight the communication space. But you want to barbell that or you balance that with something defensive, either health care or utilities for days like today.

SEANA SMITH: So the print like this, that doesn't change your base case at all or the fact that you still believe, at least, in the second half of the year, that we will see a further move to the upside.

CHRIS HARVEY: No, it doesn't. And we've been expecting volatility. We've been surprised that it's been so placid. And we thought you'd get some volatility in the first half of the year. We haven't gotten it yet. Maybe, this is it. Maybe, rates go a little bit higher. It upsets the market. But that's fine for us, because we think the status quo is here.

AI, that secular trade is here. The Fed is going to be cutting for a long period of time. And we may see an acceleration in M&A activity related to some of the regulation change with the election.

BRAD SMITH: All things considered, we're staring down a fresh earnings season at this juncture too. What do you think the theme is that prevails this earnings season off of prints like this? And with what you were saying about the resilience, but not super strong nature or, at least, profile right now of the economy.

CHRIS HARVEY: Yeah. I don't think you want to go out too far. And I don't think CEOs are going to be too aggressive. But they'll say, hey, we have opportunities. Hey, pricing is still OK. The economy is still OK.

They'll give you some risks. They'll give you some rewards. But it won't be anything-- you don't get paid to get too aggressive at this juncture. So I think the results will be fine. I think they will be good. If we do have a sell off, I think that will help firm the sell off or help improve things. But don't expect fireworks at this point in time.