Why Is the Stock Market Overlooking This Potential Headwind?

On the June 1 episode of The Morning Filter podcast, Morningstar Chief US Market Strategist Dave Sekera explained why stock investors may be shrugging off worries about an interest rate hike this year. Here’s an excerpt from the episode.

Susan Dziubinski: You mentioned inflation, and it seems like we’re seeing more talk in the financial media about the Federal Reserve possibly raising interest rates in 2026. Dave, what’s your expectation on that? Does the market seem concerned about a possible rate hike this year?

David Sekera: Well, the first part of that—actually, to answer your second question, no, the market really just doesn’t seem to be all that concerned. I mean, right now, if you look at the fed-fund futures, the probability the market’s pricing in is a 50% hike, or 50% chance of a hike, or at least one hike by the end of this year. That is lower than what it was last week or the prior week; it was at 66%, but still, to put that in perspective, in early April, the market wasn’t looking for any hikes whatsoever this year. In fact, they were still pricing in a 24% chance of a cut this year. Inflation’s heading higher. It’s going to be going the wrong way for a while as the high oil prices flow through the economy. I don’t think it’s just inflation that’s going to keep the Fed on hold and maybe even pressure the Fed to hike rates by the end of this year.

Looks like the economy is running at a pretty hot rate. Last I checked, the Atlanta Fed GDPNow—that’s their measure for kind of the ongoing run rate for the economy—was at 3.8%. In my mind, if the economy’s really this strong and inflation’s heading higher, not only is there no need to cut the fed-funds rate, there’s probably a much higher probability that they end up starting to hike it. The takeaway here, yes, the stock market is not concerned about monetary policy at this point in time. Everyone’s all still just hyper-focused on the AI buildout boom. Those stocks still continue to be screaming higher here. But yes, at some point, tightening monetary policy will be a headwind against the economy and therefore will also be a headwind against the stock market.

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