The Fed could trigger a 10% rally on a 50 basis point hike

  • The S&P 500 could jump 10% on Wednesday if Fed Chairman Jerome Powell disappoints, according to JPMorgan.
  • The bank said the potential rally could happen if the Fed raises interest rates by 50 basis points instead of the expected 75.
  • “This is the least likely and the most bullish,” JPMorgan’s trading desk said on Monday.

The Federal Reserve could spark a spectacular stock market rally on Wednesday when Chairman Jerome Powell announces his decision to raise interest rates at the Federal Open Market Committee meeting.

According to JPMorgan’s trading desk, the S&P 500 could jump as much as 10% in the unlikely event that the Fed only raises interest rates by 50 basis points and gives a weird press conference. The market currently sees an 88% chance the Fed will raise interest rates by 75 basis points on Wednesday, according to the FedWatch Tool.

A double-digit rally on Wednesday would see the market test the previous record for a one-day gain last set in 2008, when the S&P 500 jumped 11.6% on Oct. 13 amid the heightened volatility of the Great Financial Crisis. A 10% gain on Wednesday would send the S&P 500 to 4,258 based on Monday’s close.

Either way, the market has a good chance of rallying on Wednesday and next week based on past meetings this year. Of the previous 6 FOMC meetings in 2022, markets rallied 50% leading up to Fed decision day, rose 50% on Fed decision day, and were higher a week later 67% of the time.

The market could move even higher if the Fed keeps an expected 75 basis point rate hike on Wednesday, according to the note. The bank estimates a 4% to 5% gain in the S&P 500 if Powell strikes the tone at the news conference, despite hiking rates by 75 basis points.

But in the most likely scenario, JPMorgan expects the S&P 500 to decline or rise slightly on Wednesday if the Fed raises interest rates by 75 basis points and Powell strikes an aggressive tone in his press conference.

“That’s the most likely outcome with Powell maintaining optionality for the December and 2023 meetings, while stressing that current risks to inflation are moving higher. Even with a bullish press conference, we may see a retreat from 75 basis points, which softens the blow,” JPMorgan said.

In the most bearish scenario, the bank expects the S&P 500 to fall as much as 8% if the Fed raises interest rates by 100 basis points and Powell strikes a dovish tone at the news conference, as it would suggest the Fed remains concerned about taming the inflation.

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