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Are investors, stocks too eager for rate cuts in early 2024?

Investors chase the narrative that interest rate cuts will be appearing sooner rather than later in 2024, despite Federal Reserve Chair Jerome Powell's comments underlining the contrary.

Rockland Trust SVP and Director of Research Doug Butler highlights investor sentiment on recent market rallies and Fed commentary.

"I think we could end the year next year at 5,000, up 10% or so from here," Butler tells Yahoo Finance on his S&P 500 (^GSPC) outlook. "But, my guess is we have some sort of 20 to 30% pullback at some point — by the way, could happen after we hit 5,000 in March..."

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Video transcript

JULIE HYMAN: Joining us now Rockland Trust Director of Research, Doug Butler. As always, Doug, investors try to look ahead. They try to discount what they think is going to happen. And at the moment, the narrative seems to be those rate cuts are happening, maybe midway through next year. What do you think?

DOUG BUTLER: I think I'm with probably the 25% of the Street that thinks that rate cuts will happen but probably not until the end of the year. I think an awful lot of people have discounted the fact that there's no more raises coming. I could still see a scenario in which, again, as we get head closer and closer to the soft landing, they might not-- they might want to raise rates one more one last time. I wouldn't bet on the cuts just yet.

JOSH LIPTON: And so, Doug, give me that backdrop. What's your view of the equity market here, Doug? Do you think this rally continues? And what does 2024 look like?

DOUG BUTLER: I think, you know, I think we always go into it thinking we're hoping to get 10%. And you know, what do we think? Do we think that the market ends around 5,000 next year? Sure. That seems like a reasonable place for a tent. I don't think the ride is going to be that smooth, though. I think we could end the year next year at 5,000-- up 10% or so from here. But my guess is we have some sort of 20% to 30% pullback at some point. By the way, could happen after we hit 5,000 in March. Then we get the 20% pullback.

But I do think that we're set up, especially that last segment, where you showed the spread between bullish sentiment and bearish sentiment, I think when it's that wide, you might want to start getting your helmets on.

JULIE HYMAN: Yeah. So where should people be putting their helmets on metaphorically, right? Yeah. What-- defense, is that what it looks like right now?

DOUG BUTLER: Well, we are we're underweight in the consumer discretionary and the tech space. And that's largely because we essentially weighed a lot of it based on earnings. And so the earnings for those sectors are disproportionate, the multiples for them are disproportionately high. So we generally are underweight in those sectors. So the-- but I think for we we're biased towards defensives and towards high quality and low volatility.

Two names that have popped up for us, Accenture. Accenture is a really interesting name, in that, they're a tertiary beneficiary of this move to AI. They're probably the best suited to help business clients move to the cloud and to more of these AI-architected software. So we think that they're well positioned.

And then in terms of defensives, we like Verizon. We've unfortunately liked it for quite a while, but we like it here. Particularly, we think they're getting their turnaround in place. They've improved their free cash flow a lot. They've been able to really grow this fixed wireless access business, sort of 5G in the home. We think that has some competitive advantages over the cable companies.