If the Federal Reserve turns hawkish this week, the upward momentum of the US stock market may come to an end.

The market widely expects a rate cut in 2024, but if the Federal Reserve maintains its "hawkish" stance in this week's meeting, investor expectations for the market may change and stocks could decline at the end of the year.

Alex McGrath, Chief Investment Officer of NorthEnd Private Wealth, believes that no upcoming reports will change the Federal Reserve's monetary policy stance. He stated that "expectations of a rate cut by the Federal Reserve next year have supported the recent rise in the stock and bond markets."

Since July 2022, the federal funds rate has remained in the range of 5.25% to 5.5%, reaching a 22-year high. After experiencing a decline in 2022, the US stock market achieved a strong recovery in 2023, especially with significant growth in November.

According to Dow Jones market data, as of Friday, the Dow Jones Industrial Average was only 1.5% below its highest closing price from about two years ago. At the same time, the S&P 500 reached its highest closing price since March 2022. The Nasdaq reached a new closing high since April 4th last year. Meanwhile, the 10-year Treasury yield has significantly decreased from its 16-year high of 5%, leading to an increase in bond prices.

However, there is a divergence in the market regarding the direction of Federal Reserve policy. According to Melissa Brown, Senior Director of Applied Research at Axioma, there is still no complete consensus among Federal Reserve officials and investors on when the Federal Reserve will begin to ease monetary policy. In addition, based on data from the federal funds futures market, traders' predictions for rate cuts have been changing in the past few months.

The performance of the bond market on Friday indicates that investors may be reassessing the interest rate trend in 2024. High-risk bonds, such as the JNK and HYG high-yield bond ETFs, which are often seen as indicators of market sentiment, have temporarily stopped rising due to the impact of declining benchmark borrowing costs, despite attracting a large amount of funds in recent weeks. Meanwhile, the rise in the yields of 10-year and 30-year Treasury bonds reflects investors' uncertainty about the future economy and policy direction since mid-October.

Moreover, it is almost certain that the Federal Reserve will not cut rates at its last meeting of the year held this week. CME's FedWatch tool shows that there is a 98.4% probability that the Federal Reserve will keep rates at the level of 5.25% to 5.5% in this meeting.In addition, Nick Timiraos, a well-known financial journalist also known as the "New Fed News Agency," pointed out in his latest article:

Federal Reserve officials are unlikely to have serious discussions about when to cut interest rates this week, unless the economic weakness exceeds expectations, it is unlikely to be (seriously discussed) in the coming months.

Ed Clissold, Chief U.S. Strategist at Ned Davis Research, expressed doubts about the possibility of a rate cut early next year. He stated that the Fed's transition from a tightening monetary policy requires a gradual process. The Fed may gradually shift from a hawkish stance to a neutral one before considering a rate cut.

Mike Sanders, Head of Fixed Income at Madison Investments, also takes a cautious stance. He believes that the market's expectation of a rate cut in March next year is too aggressive, and it is more likely that the Fed will start cutting rates in the second half of next year. He mentioned that considering the continued strength of the labor market, which has led to stubborn service sector inflation, the recent U.S. employment report showed an addition of 199,000 jobs in November, exceeding the expected 190,000, with wage increases and a decline in the unemployment rate to 3.7%, the lowest in four months. Sanders believes that these data indicate that there are no signs of economic weakness that would require the Fed to take action to lower inflation.

Sanders believes that the Fed may continue to be "hawkish." This attitude may be reflected in the "dot plot" interest rate forecast to be released on Wednesday. In addition, although the Fed paused its rate hikes in September, its statement reinforced its commitment to "maintaining high rates in the long term." Sanders also emphasized that inflation may accelerate again, and the Fed is more concerned about inflation, so it is unlikely to relax its policy too early. Before the Fed's decision, updated data on the Consumer Price Index (CPI) and Producer Price Index (PPI) for November will be released, which will directly impact the Fed's rate cut decision.

It is worth noting that despite this, there are also voices in the market that are bullish on the stock market. MarketWatch pointed out that seasonal factors may have a positive impact on the stock market in December. According to historical data, whether it is a bull market or a bear market, the Dow Jones Industrial Average has risen 70% of the time in December.

Clissold, Chief U.S. Strategist at Ned Davis Research, stated that the overall market outlook remains optimistic. He mentioned that if the U.S. economy can achieve a "soft landing," it will help the current market continue its bullish trend.