Wall Street hates surprises and on Wednesday it didn’t get any from the Federal Reserve. As widely expected, the U.S. central bank kept interest rates on hold at 5.25% – 5.50%.

Now attention has shifted to when the Fed cuts rates. It’s considered a given that the Fed will eventually loosen this year, but the unanswered question is timing.

In its official statement, the policy-making Federal Open Market Committee (FOMC) optimistically stated: “The Committee judges that the risks to achieving its employment and inflation goals are moving into better balance.”

During his traditional post-meeting press conference, Fed Chair Jerome Powell offered clues as to what’s next in terms of monetary policy.

“Inflation is still too high, ongoing progress in bringing it down is not assured and the path forward is uncertain,” Powell said. “I want to assure the American people we are fully committed to returning inflation to our 2% goal.”

Translation: The Fed’s hold on rates is likely to last beyond the next FOMC meeting in March. As this realization sunk in with investors, the main U.S. stock market indices closed lower on Wednesday as follows:

• DJIA: -0.82%
• S&P 500: -1.61%
• NASDAQ: -2.23%
• Russell 2000: -2.45%

However, in a bullish development for equities, the benchmark 10-year U.S. Treasury yield fell 2.27% to close at 3.96%, below the inflection point of 4.0%.

Encouraging inflation reports over the past week underscore the case that Fed tightening is over. However, Wall Street has been a little too optimistic about how many cuts we’ll get in 2024, and how soon.

Until Wednesday, the markets had been pricing in about six Fed rate cuts this year, but that contradicts the Fed’s own “dot plot” from its December meeting which indicates only three rate cuts ahead.

WATCH THIS VIDEO: “Fed Air” Executes a Soft Landing

Powell on Wednesday acknowledged the progress on both economic growth and inflation, but he pushed back on hopes for aggressive easing.

My own view is that we’ll probably get three to four rate cuts in 2024, starting sometime in early summer, as inflation continues to fall.

We’re on the path for an economic soft landing, which is the holy grail of monetary policy. Although interest rates hover at a 22-year high, the U.S. economy is expanding.

Fourth-quarter U.S. gross domestic product (GDP) growth surpassed forecasts, coming in at 3.3% annualized, versus expectations of 2.0%. For full-year 2023, “real” (inflation adjusted) GDP growth came in at 2.5%. Despite this healthy economic growth, U.S. price inflation has slumped to its lowest level since May 2020.

The news from Bizarro World…

And yet, in the latest Gallup poll of the American public’s views on the economy, (released January 30), 45% of respondents rate the economy as poor and 63% say it is getting worse, not better.

The public’s pervasive gloom amid strong economic conditions reminds me of “Bizarro World” in the Superman comics. It’s a planet where everything is weirdly inverted, where up is down and black is white; where people say “hello” when they mean “goodbye.”

For Bizarro-type misperceptions about the economy, you can mostly blame political demagogues and their shills in the partisan media. Here’s a fact from the real world: Stocks historically have done well when the Fed makes a dovish pivot in a non-recessionary context.

Since 1990, the average 12-month return after the first Fed rate cut, in periods of no recession, has been about 7.6%, versus just a 0.5% return in periods of recession (see chart).

Fourth-quarter earnings season is putting a spotlight on the “Magnificent Seven” mega-cap technology stocks: Amazon (NSDQ: AMZN); Alphabet (NSDQ: GOOGL); Apple (NSDQ: AAPL); Meta Platforms (NSDQ: META); Microsoft (NSDQ: MSFT); Nvidia (NSDQ: NVDA); and Tesla (NSDQ: TSLA).

Most of these stocks have seen their stock prices hit record-high levels in recent weeks, which in turn has been driving the S&P 500 higher. The downside to this dynamic, though, is that the tech behemoths have been “priced to perfection,” which means even slight disappointments in their operating results can send their share prices (and the broader market) lower.

Case in point: Microsoft and Alphabet reported results Tuesday after the opening bell that beat analysts’ expectations on the top and bottom lines, but investors were disappointed nonetheless and their shares came under pressure.

Sometimes on Wall Street, good isn’t good enough. Revenue from Alphabet’s Google ad business missed expectations and Microsoft’s guidance was perceived as light.

On Thursday, Amazon (NSDQ: AMZN), Apple (NSDQ: AAPL), and Meta Platforms (NSDQ: META) all report quarterly results.

The bull market narrative remains in place, but Q4 earnings results so far have been mixed and the Fed’s intentions remain unclear. Expect further volatility in the weeks ahead.

Speaking of Apple…

On Friday, February 2, the Cupertino-based computer giant is scheduled to release its new Vision Pro device, a headset that promises to shake up the augmented/virtual reality (AR/VR) market.

However, the tech analysts at Investing Daily have determined that this new Apple gadget is dependent on mission-critical software made by a tiny, under-the-radar tech innovator. Without the software provided by this small company, Apple’s so-called genius device would be a catastrophic failure.

Apple’s dependence on this software opens a huge investment opportunity. You won’t see this small-cap stock mentioned on CNBC, but it’s poised to explode on the upside.

I urge you to make your move before February 2. That’s the day Apple rolls out the new Vision Pro device…and that’s when a profit surge could start for their small software partner. Click here to learn more.

John Persinos is the editorial director of Investing Daily.

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