Société Générale believes U.S. stocks could fall if the Federal Reserve is less supportive than expected. Subadra Rajappa warned that if the markets think the Fed is hesitant to cut rates as much as predicted, we might see an “unwind.” Should the Fed’s dot plot indicate fewer rate cuts than anticipated, stocks may drop. This could strengthen the U.S. dollar and raise Treasury yields, while riskier assets like stocks and gold could struggle.

Critical Event: Fed Dot Plot

The upcoming Fed dot plot is significant because it may surprise the market with a hawkish outlook. Currently, futures suggest at least two rate cuts by the end of 2025. However, August’s inflation data revealed that the core CPI remains high at 3.3%. If the Fed’s new projections suggest only one rate cut or no cuts, the market may be caught off guard. It would be wise to seek downside protection for stocks, especially as the VIX hovers around a low of 14. An “unwind” could suddenly increase market volatility, making protective puts on the S&P 500 or Nasdaq 100 indices an affordable strategy against a sudden drop from current highs. This approach focuses on preparing for a quick shift in market sentiment rather than predicting a crash. A more cautious Fed would likely strengthen the U.S. dollar and raise Treasury yields. To prepare for this, we can short 10-year Treasury note futures, expecting a possible return to the 4.1% yield seen earlier this summer. Additionally, call options on the U.S. Dollar Index (DXY) provide a straightforward way to benefit from a shift toward safe assets.

Gold Market Vulnerability

Gold faces challenges in this scenario, as a stronger dollar and higher real yields make it harder for the metal to thrive. After reaching over $2,400 an ounce in the first half of the year, gold could see a pullback to around $2,300. We can utilize put options on major gold ETFs to prepare for this potential decline. Looking back at the 2022-2023 rate hike cycle shows how quickly assets can adjust. The market often underestimated the Fed’s commitment to controlling inflation, leading to sharp sell-offs whenever a hawkish reality hit. The risk now is that we may be witnessing a similar overconfidence among investors. Create your live VT Markets account and start trading now.

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