Bank of America U.S. economist Michael Gapen maintains his forecast that the Federal Reserve will make its first rate cut in December, diverging from the wide majority of analysts and investors who are heavily betting on a September move.

During an event call on Wednesday organized by the investment bank, Gapen expressed that the U.S. economy is stabilizing, slowing, but not collapsing. The labor market remains robust, inflation is easing, and supply-side recovery keeps growth within potential.

"Disinflation has hit a speed bump in early 2024, but we think inflation will reach the 2% target in 2026," Gapen stated.

Gapen anticipates the Fed to cut rates in December, followed by a pace of 25 basis points each quarter next year.

He mentioned that more evidence, particularly further labor market cooling and progress in inflation, is required to shift his view to a September rate cut. "We need to hear what the Fed thinks at the July meeting," he added.

Equity market outlook: Go value

Analyst Savita Subramanian presented a cautiously optimistic outlook on the U.S. stock market, despite potential near-term volatility.

Bank of America stuck with a year-end S&P 500 target of 5,400 points, indicating some downside from current levels but also highlighting opportunities in certain sectors.

"Election uncertainty is significant," Subramanian noted. "We're entering a seasonally weak period marked by heightened policy uncertainty, which could lead to a pullback."

Subramanian remains confident in large-cap value stocks within cyclical sectors like energy, financials, and materials, despite a more conservative view on the overall index.

According to Subramanian, investors are overestimating the negative risks in the current economic environment and underestimating the probability of a period of relative economic stability. "The economy is likely to perform well over the next few years due to substantial fiscal stimulus, despite concerns about the deficit."

Bank of America's U.S. regime indicator is currently in the "Recovery" phase, which supports value and risk. This phase typically aligns with stronger earnings growth.

In 2023, the "Magnificent 7" companies, as tracked by the Roundhill Magnificent Seven ETF (NYSE:MAGS), posted strong earnings growth, while the rest of the S&P 500 experienced an earnings recession.

The situation has flipped: the 'Other 493' companies in the S&P 500 are now exhibiting earnings growth, while mega-cap tech companies are starting to decelerate.

Read now:

• 'The Other 493' Set To Grow More Than 'Magnificent 7' This Earnings Season: Bank Of America

Image created with photos from Shutterstock and using artificial intelligence via Midjourney.