Fed Could Spark 10% Rally on 50 Basis Point Hike

• The S&P 500 could soar 10% on Wednesday if the Fed Chairman Jerome Powell turns dovish, according to JPMorgan.
• The bank said the potential head-spinning rally could happen if the Fed hikes rates by 50 basis points rather than the expected 75.
• “This is the least likely and the most bullish,” JPMorgan’s trading desk said on Monday.

The Federal Reserve could spark a head-spinning rally in the stock market on Wednesday when Chairman Jerome Powell announces its interest rate hike decision at the Federal Open Market Committee meeting.

According to JPMorgan’s trading desk, the S&P 500 could soar as much as 10% in the unlikely event that the Fed hikes interest rates by only 50 basis points and gives a dovish press conference. The market currently sees an 88% chance the Fed hikes rates by 75 basis points on Wednesday, according to the FedWatch Tool.

A double digit rally on Wednesday would have the market testing its prior record one-day surge last seen in 2008, when the S&P 500 soared 11.6% on October 13 amid the heightened volatility of the Great Financial Crisis. A 10% surge on Wednesday would send the S&P 500 to 4,258 based on Monday’s closing price.

Either way, the market has a good chance at rallying on Wednesday and in the ensuing week based upon prior meetings this year. Of the 6 prior FOMC meetings in 2022, markets rallied 50% of the time heading into the Fed decision day, were up 50% of the time on Fed decision day, and were higher one week later 67% of the time. 

The market could still move higher if the Fed sticks with its expected 75 basis point rate hike on Wednesday, according to the note. The bank estimates a 4% to 5% surge in the S&P 500 if Powell strikes a dovish tone in his press conference despite hiking rates by 75 basis points.

But in the most likely scenario, JPMorgan expects the S&P 500 to be down or up slights on Wednesday if the Fed hikes rates by 75 basis points and Powell strikes a hawkish tone in his press conference. 

“This is the most likely outcome with Powell retaining optionality for December and 2023 meetings while emphasizing the current risks to inflation moving higher. Even with a hawkish press conference, we may see language suggesting that a step down from 75 basis points is coming, which softens the blow,” JPMorgan said. 

In the most bearish scenario, the bank expects the S&P 500 to fall as much as 8% if the Fed hikes interest rates by 100 basis points and Powell strikes a hawkish tone in his press conference, as it would suggest the Fed is still concerned about taming inflation.