Expect 3 rate cuts from the Fed this year, says Wilmington Trust's Meghan Shue

Core Viewpoint - The current earnings season has been positive, but there are concerns about potential weaknesses in the economy, particularly in the labor market, which may not be as strong as anticipated [2][4]. Earnings and Market Performance - Earnings reports have generally met expectations, but guidance for the upcoming quarter and full year has been slightly disappointing, leading to a cautious outlook [4][10]. - Companies that do not significantly exceed earnings expectations or provide strong guidance may see their stock prices decline, reflecting market optimism rather than negative earnings performance [4]. Economic Outlook - The company forecasts a GDP growth of about 1% for 2026, indicating a more pessimistic view compared to market consensus, primarily due to negative private job growth outside of healthcare [4][5]. - There are signs of cracks in the labor market, with reduced immigration and the impact of AI contributing to a slowdown in job growth [5][6]. Labor Market Dynamics - The labor market is experiencing a reluctance to hire, influenced by tariffs, geopolitical risks, and uncertainty, which affects CEO and consumer confidence [7][8]. - The current job growth dynamics are unusual for a non-recession period, raising concerns about the underlying causes [5]. Federal Reserve and Interest Rates - The expectation is that the Federal Reserve will implement more rate cuts than the market currently anticipates, with a base case of three cuts this year [9][10]. - Inflation is not seen as a primary concern; however, there are worries that consumer spending may not be sustainable as it is outpacing income growth [11]. Investment Strategy - Despite economic caution, the company advocates for being fully invested in the equity market, anticipating solid earnings growth of about 15% this year and around 10% the following year [12][13]. - The potential for high single-digit returns in the equity market is expected, driven by continued momentum and the costs associated with being overly bearish [14].