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Fed rate hike – 6 scenarios and how the S&P 500 could react

JPMorgan’s trading desk now sees room for a massive rally should policymakers turn dovish when they announce their decision on Wednesday.

The S&P 500 could surge at least 10% in one day if the central bank raises interest rates by a slower-than-expected half a percentage point.

The scenario is the “least likely” to materialize, yet the “most bullish” outcome for equity investors, JPMorgan wrote in a note to clients on Monday.

Laying out every possible scenario on Fed day, the JPMorgan team is embarking on a high-stakes task of predicting market moves based on an event that has largely been positive for stocks this year.

Of the six prior meetings, the S&P 500 rose four times on Fed day and fell on the other two, according to Bloomberg data.

The bank’s economists expect the Fed to boost rates by another three-quarter percentage point, in line with the median forecast in a Bloomberg survey.

Still, the exercise offers a lens into the risks that investors are grappling with.

“These outcomes are skewed to the upside as our view is that last week the market had every reason to retest lows given the disappointment from mega cap tech earnings and still moved higher,” JPMorgan said.

“Several client conversations have focused on trying to identify who is the incremental seller; we think the risk/reward is to the upside.”

Below are the scenarios from the JPMorgan team on how the S&P 500 could react on Fed day.

  • 50 basis point hike, with a dovish press conference (highly unlikely) – S&P 500 up 10% to 12%
  • 50 basis point hike and a hawkish press conference (unlikely) – S&P 500 up 4% to 5%
  • 75 basis point hike and a dovish press conference (second-highest probability)  – S&P 500 up 2.5% to 3%
  • 75 basis point hike and a hawkish press conference (most likely outcome) – S&P 500 down 1% to up 0.5%
  • 100 basis point hike and a dovish press conference (unlikely) – S&P 500 down 4% to 5%
  • 100 basis point hike and a hawkish press conference (highly unlikely) – S&P falls 6% to 8%

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