J.P. Morgan's Gabriella Santos: Fed cuts this cycle won't inject extraordinary liquidity

Market Overview - Stocks are trading around record levels, with a shift in focus from fiscal and trade policies to monetary policy [1] - The first half of the year was heavily influenced by policy, leading to a better understanding of market equilibrium [2] Monetary Policy Impact - The return of Fed rate cuts is a leading narrative, with stocks and bonds typically performing well during such periods, especially without a recession [2] - Current economic conditions are characterized by soggy growth and elevated valuations, making it crucial to understand the nuances of the Fed's rate-cutting cycle [3][4] Economic Conditions - Inflation is a significant factor, acting as a speed bump rather than a stop sign for Fed rate cuts, with expectations of cuts bringing rates closer to a neutral level around 3% [5] - The economy is less sensitive to interest rates than in the past, suggesting that rate cuts may not have the same stimulating effect as before [6] Valuation Concerns - Current stock market multiples are at 23 times, the highest levels seen in 20 years, which may moderate expected returns over the next 5 to 10 years [8] - Extended valuations create room for disappointment, prompting discussions on reducing equity exposure and using options for downside protection [9] Policy and Margins - The impact of monetary policy on margins is a concern, as tariffs may not reflect in consumer prices but will affect company margins [11][12] - Disappointment in expected margin expansion is anticipated, particularly for consumer-oriented sectors and small to mid-cap companies [12] AI Investment Focus - There is a growing focus on capital expenditures (capex) and their return on investment, with significant investments being made in AI [13] - Market reactions to AI spending are mixed, with some companies being rewarded while others face scrutiny regarding the effectiveness of their investments [14]