JPMorgan Models Five Scenarios for S&P 500 on Fed Day, With Outcomes Ranging From -2% to +1%

A new scenario analysis from JPMorgan suggests the S&P 500 could swing between a 2.0% loss and a 1.0% gain following the Federal Reserve's policy decision today. The bank's research underscores that the market's reaction will depend less on the expected rate hike and more on the forward-looking language from Fed Chair Jerome Powell.

The Five Potential Paths

JPMorgan outlined five distinct scenarios, attributing a specific S&P 500 reaction to each combination of policy action and central bank rhetoric. The bank's baseline expectation, which aligns with Wall Street consensus, is for a modest equity gain.

• Baseline (Consensus): A 25 basis point hike with no explicit forward guidance. Projected S&P 500 Impact: +0.25% to +0.75%.
• Hawkish Clarity: A 25 bps hike while signaling the removal of 2025 rate cuts in favor of more hikes this year. Projected S&P 500 Impact: +0.50% to +1.00%.
• Neutral Rate Risk: A 25 bps hike accompanied by discussion of a higher neutral real interest rate (R-star). Projected S&P 500 Impact: -0.25% to -1.00%.
• Dovish Pause (Bearish): No rate hike (0 bps). Projected S&P 500 Impact: -1.25% to -1.75%.
• Severe Hawkish Pivot: A 25 bps hike with a signal that rates must go "materially higher." Projected S&P 500 Impact: -1.00% to -2.00%.

Interpreting the Scenarios

The analysis highlights several non-intuitive potential outcomes for investors. Surprisingly, a decision to pause rate hikes is viewed as the second-most bearish scenario. JPMorgan argues a pause would be interpreted as the Fed losing its grip on inflation, leading to higher long-term bond yields and compressing equity valuations.

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Conversely, the most bullish outcome involves a hawkish but clear message. A 25 bps hike paired with a decisive signal to replace future cuts with more immediate hikes would be rewarded by markets as a sign of confidence, according to the bank. The worst-case scenario, which JPMorgan warns could end the current bull market, involves rhetoric suggesting rates need to move "materially higher," echoing the aggressive hiking cycle of 2022-2023.

What Investors Are Watching

While the rate decision itself is a key data point, JPMorgan's analysis indicates that the true market-moving event will be Chair Powell's press conference and the updated economic projections, or "dot plot." Traders will be closely parsing the Fed's language for any discussion of the neutral rate or hints of a more aggressive path forward.

The note suggests that a restrained message focused on price stability offers the best path for equities. However, any indication of a significant upward revision to the policy rate's ultimate destination risks a sharp repricing in both the bond and stock markets, particularly for rate-sensitive sectors like technology.