Stocks to rally post-FOMC Wed. Rising chances of US involvement trigger risk-off, but high-yield and VIX suggest mild risks for stocks.

VIDEO: While Fed is not expected to cut Wed, we expect markets to rally given our view Fed has to acknowledge inflation is falling short of their views. This should help rate sensitives like Financials XLF 0.34%  KRE 0.67%  and small-caps IWM 1.07% .

Please click below to view our Macro Minute (duration: 4:07).

Equities came under pressure today as rising risks of US involvement trigger risk-off. Many skeptical investors (those who stayed on sidelines from April low) may argue we are at a turning point for stocks to decline. We believe this is too early for investors to take this view:

• Today, markets became wary of the risk the US would directly involve itself in the Israel-Iran conflict. The White House used terms like “we” and polymarket.com shows betting odds of US involvement jumped to 76%.
• Equities and oil fell on Tuesday, with S&P 500 down -0.8% and oil up +4.3%. We often look at high-yield (spreads) and VIX as stronger arbiters of market risk and sentiment.
• Spot VIX closed at 22, which is elevated (above 20) but as shown below, is at levels seen in late May. And late-May was hardly a time to be de-risking. Similarly, US HY OAS (option adjusted spread) is at 355. And this level, while up from two days ago, is at levels seen just 10 days ago. So the message from these markets is that a broader de-risking is not warranted.
• The June FOMC rate decision is Wed with a press conference at 2:30pm ET. The Fed is not expected to cut rates. But despite the “non-action” we think odds favor a stock rally. Why?
• We believe the Fed will acknowledge that inflation is undershooting their expectations. Recall the Fed has argued that tariff uncertainty causes them to be on hold. But incoming inflation has been soft. And even market-based measures show little future expectations for inflation (1Y1Y breakevens) is at the lowest levels in a year.
• So we think Fed will have to acknowledge this. And we know there is a lot of partisan bias in the inflation consumer surveys. So markets likely realize Fed will have to relent eventually and return to a dovish bias.

• The macro data this week is below. The most important is June FOMC Decision on Wed:
  – 6/16 Mon 8:30 AM ET: Jun Empire Manufacturing Survey    -16.0 vs -7.5e
  – 6/17 Tue 8:30 AM ET: May Retail Sales    -0.9% vs -0.6%e
  – 6/17 Tue 10:00 AM ET: Jun NAHB Housing Market Index    32 vs 36e
  – 6/18 Wed 9:00 AM ET: Jun M Manheim Used Vehicle Index   
  – 6/18 Wed 2:00 PM ET: Jun FOMC Decision    Hold e
  – 6/18 Wed 4:00 PM ET: Apr Net TIC Flows   
  – 6/19 Thu: Juneteenth (Market Closed)
  – 6/20 Fri 8:30 AM ET: Jun Philly Fed Business Outlook    -1.5e

BOTTOM LINE: Still “most hated rally”

This still remains the “most hated” V-shaped stock rally. We view Bitcoin as a leading indicator and thus, we expect stocks to reattain all time highs, which Bitcoin achieved last week. We see S&P 500 reaching 6,600 by year-end.

And the expected drivers for this upside are:

• Still most hated rally
• Sizable perception gap: Tariff “bark worse than bite”
• Hedge funds increased short interest recently
• $7 trillion cash on sidelines
• Investment outlook better now than in Feb 2025:
  – tariff visibility
  – tax and de-regulation visibility
  – US cos survived 5^th major “stress test”
  – Fed more dovish in 2026

As for what we would buy

• Washed out stocks
• MAG7 & Bitcoin
• Industrials
• Financials: Large-cap and regional banks
• Small-caps
  

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Key Incoming Data June:

• 6/2 9:45 AM ET: May F S&P Global Manufacturing PMI Tame
• 6/2 10:00 AM ET: May ISM Manufacturing PMI Tame
• 6/3 10:00 AM ET: Apr JOLTS Job Openings Tame
• 6/3 10:00 AM ET: Apr F Durable Goods Orders MoM Tame
• 6/4 9:45 AM ET: May F S&P Global Services PMI Tame
• 6/4 10:00 AM ET: May ISM Services PMI Tame
• 6/4 2:00 PM ET: Jan Fed Releases Beige Book Mixed
• 6/5 8:30 AM ET: 1Q F Unit Labor Costs Tame
• 6/5 8:30 AM ET: 1Q F Nonfarm Productivity QoQ Tame
• 6/5 8:30 AM ET: Apr Trade Balance Tame
• 6/6 8:30 AM ET: May Non-farm Payrolls Tame
• 6/6 9:00 AM ET: May F Manheim Used Vehicle Index Tame
• 6/9 11:00 AM ET: May NYFed 1yr Inf Exp Tame
• 6/10 6:00 AM ET: May Small Business Optimism Survey Tame
• 6/11 8:30 AM ET: May Core CPI MoM Tame
• 6/12 8:30 AM ET: May Core PPI MoM Tame
• 6/13 10:00 AM ET: Jun P U. Mich. 1yr Inf Exp Tame
• 6/16 8:30 AM ET: Jun Empire Manufacturing Survey Tame
• 6/17 8:30 AM ET: May Retail Sales Tame
• 6/17 10:00 AM ET: Jun NAHB Housing Market Index Tame
• 6/18 9:00 AM ET: Jun M Manheim Used Vehicle Index
• 6/18 2:00 PM ET: Jun FOMC Decision
• 6/18 4:00 PM ET: Apr Net TIC Flows
• 6/20 8:30 AM ET: Jun Philly Fed Business Outlook
• 6/23 9:45 AM ET: Jun P S&P Global Services PMI
• 6/23 9:45 AM ET: Jun P S&P Global Manufacturing PMI
• 6/23 10:00 AM ET: May Existing Home Sales
• 6/24 9:00 AM ET: Apr S&P CS home price 20-City MoM
• 6/24 10:00 AM ET: Jun Conference Board Consumer Confidence
• 6/24 10:00 AM ET: Jun Richmond Fed Manufacturing Survey
• 6/25 10:00 AM ET: May New Home Sales
• 6/26 8:30 AM ET: May P Durable Goods Orders MoM
• 6/26 8:30 AM ET: May Chicago Fed Nat Activity Index
• 6/26 8:30 AM ET: 1Q T GDP QoQ
• 6/26 11:00 AM ET: Jun Kansas City Fed Manufacturing Survey
• 6/27 8:30 AM ET: May Core PCE MoM
• 6/27 10:00 AM ET: Jun F U. Mich. 1yr Inf Exp

Economic Data Performance Tracker 2025:

Economic Data Performance Tracker 2024:

Economic Data Performance Tracker 2023: