US stock market rally lacks fundamentals and Fed rate hikes will ‘break the back’ of something in markets, says economist David Rosenberg

David Rosenberg

David Rosenberg.Screenshot via Bloomberg TV

  • This year’s stock market rally was simply sentiment-driven and “devoid of fundamentals”, said David Rosenberg.

  • It’s only a matter of time before the Fed’s interest rate hikes “break something’s back” in the markets, he warned.

  • The next 12 months are going to be “really tough” as the lagged effects of Fed tightening kick in, he added.

US stocks’ best first-half run since 2019 was just a rally driven by ‘fundamental-free’ sentiment – and it’s only a matter of time before the trend falters on the back of rate hikes interest rate from the Federal Reserve, according to David Rosenberg.

The S&P 500 index jumped nearly 16% in the six months to June, buoyed by investor enthusiasm for artificial intelligence and bets that the Fed is about to end its political tightening. The gauge slid 19% in 2022 as central bank rate hikes – aimed at tackling inflation – undermined investor sentiment.

However, the rebound in equities this year has been driven more by “sentiment and momentum” than by better economic prospects, Rosenberg said in an interview with CNBC on Thursday. The veteran economist has long been bearish on the U.S. economy, warning that a recession has already hit U.S. corporate earnings and that stocks will plunge back into a bear market when a broader slowdown sets in.

“I don’t know if the market is telling you anything about earnings, anything about the economy. It’s a sentiment and momentum driven market, I think pretty much devoid of fundamentals. And at some point given, Fed tightening, which is interminable, is going to break the back of something,” he told the outlet.

The head of Rosenberg Research said there is a risk the Fed will raise interest rates by two or more times this year – and that’s bad news for the US economy. Rising interest rates increase the cost of debt for businesses and individuals, discouraging investment and spending.

“The next 12 months are going to be really tough. That’s when all the delays from the Fed are really going to kick in,” he said.

The Fed has raised its benchmark rates by 500 basis points since March 2022 – the biggest increase since the 1980s.

“I don’t think this Fed is confident in its forecasts or its models. It’s basically telling us that it’s data driven. But I’ve never seen a central bank so focused on data that is inherently contemporary and up-to-date. trolling,” Rosenberg said.

Read the original article on Business Insider

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