The decision by the United States Federal Reserve to reduce interest rates is indicative of a slowdown in the country’s economy, which may lead to a longer downturn driven by increasing consumer costs due to tariffs, according to Talaria Capital co-chief investment officer Chad Padowitz.
Addressing the 0.25 per cent decrease in rates last week, Padowitz noted this did not occur without a range of factors involved and investors should be aware how it might impact US shares.
“If rate cuts are driven by weakening economic momentum, financial system stress or policy intervention, rather than economic strength, the broader negative implications are likely to outweigh the benefits of lower rates,” he said.
“The current trajectory of monetary easing in the US appears to be a response to slowing economic activity rather than any meaningful increase in productivity, which warrants a more cautious stance.
“The weakness we are seeing now is not unusual and suggests investors should brace for a prolonged adjustment before conditions improve.”
He noted tariffs would add to any slowing of the US economy as many companies had not fully passed related higher costs to consumers.
“Tariffs are a key threat to corporate profits. With consumer sentiment subdued, many firms lack the pricing power to pass on higher costs. This will squeeze margins, directly impact earnings and weigh broadly on equity markets,” he stated.
“Even from a more optimistic perspective, US equity valuations are already elevated and earnings expectations for the next 12 months appear quite ambitious. As such, any potential upside from lower rates may already be priced in, limiting the scope for further re-rating.”
He pointed out while the Nasdaq index had continued to be driven by technology stocks and media company mergers, other sectors, such as vaccine makers, had faltered off the back of health concerns in the US, and this variation in performance reflected the balance between short-term optimism and longer-term challenges.
“Investors need to be discerning. There are still areas of genuine value, but the broader backdrop, being tariffs, debt and slowing growth, demands careful navigation,” he said.