3Fourteen Research's Warren Pies: Lower rates means you don’t want to be underweight equities

Market Outlook - 314 Research maintains its S&P 500 target of 6,800 for 2025, approximately 2% from current levels [1] - The equity market experienced two positive developments from the Fed this week, supporting a continued long position in the bull market [2] - A potential growth scare, with an estimated one-third chance of occurring in the coming months, could lead to a 7-8% pullback in the equity market [9] - In a growth scare scenario, the 10-year Treasury yield could potentially drop below 350 basis points (35%), although this is not the base case [11] Fed Policy & Economic Indicators - The market had priced in more rate cuts than the Fed signaled in June, setting a high bar for the Fed to clear [3] - Instances where the Fed moves slightly towards market expectations after high expectations have historically been positive for equities in the following quarter [4] - The Fed is effectively lowering the real Fed funds rate (nominal Fed funds rate minus inflation projections) across 2025-2027 [6] - The Fed may be more concerned about the labor market than they are letting on, potentially anticipating a larger left tail risk [16][17] Portfolio Strategy - 314 Research is pressing longs into year-end, paired with an overweight bond position [10] - Investors should prepare their portfolios for potential risks, particularly related to growth concerns [17] - During a growth scare, equities tend to experience increased volatility, with potential drawdowns, while bonds rally [9][16]