Wall Street’s ceasefire rally faded when inflation and rate cut delays became unavoidable

Traders have nearly abandoned expectations of a Fed rate cut this year. The Middle East conflict ignited a spike in oil prices, triggering the largest monthly inflation increase since 2022. National gasoline prices surged above $4 per gallon, and year-over-year inflation is now projected to hit 4% this summer—pushing back the Federal Reserve’s path to a neutral rate. JPMorgan Asset Management expects inflation to fall below 2% next year, permitting one or two cuts in 2025. But for now, the Fed’s options are constrained. Goldman Sachs Asset Management anticipates just one rate cut in 2024, pending clearer signals on growth and inflation. Allspring Global Investments went further, postponing one of its two expected cuts to 2027. Wells Fargo responded by slashing its S&P 500 target from 7,800 to 7,300 points. Blackrock downgraded risk assets from overweight to neutral and remains underweight on long-term U.S. Treasuries, favoring European bonds as long-end rates climb. The two-year U.S. Treasury yield jumped nearly 50 basis points to 3.8%, creating what Goldman Sachs sees as a repositioning opportunity in U.S. fixed income. But corporate credit is under pressure—the credit cycle, strategists say, appears to be turning. The S&P 500 rallied 3.6% this week, its best showing since last November, fueled by brief ceasefire hopes. By Friday, the gains eroded as peace talks stalled. The market, once anchored by rate cut bets, now grapples with a reality where inflation lingers, earnings growth is concentrated in a handful of tech giants, and direction remains elusive.