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Canaccord Genuity’s Tony Dwyer believes that the Federal Reserve may have new incentives in the second quarter to cut rates deeper this year. He argues that a deteriorating jobs market and easing inflation will likely push the Fed to act more aggressively. Dwyer points to falling employment survey participation rates skewing job report data and emphasizes the need for rate cuts based on incoming data. At the March Federal Reserve policy meeting, officials tentatively planned to cut rates three times this year, which would be the first cuts since March 2020.

Dwyer predicts that the rate reduction will benefit financials, consumer discretionary, industrials, and health care stocks, which have shown positive performance this year. He advises clients to buy into the broadening theme on weakness rather than solely focusing on mega-cap weighted indices. Dwyer suggests that the market performance will become more even by the end of this year and into 2025, with a broadening of earnings growth participation. He points out that the “Magnificent Seven” stocks, including Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla, have been outperforming the broader market this year, with a 17% increase compared to the S&P 500’s 10% gain.

Despite the S&P 500 reaching a record high and posting its strongest first-quarter gain in five years, Dwyer warns against becoming too overbought and extreme to the upside. He advises waiting for better trading opportunities, particularly when considering worsening employment data that may lead to rate cuts. Dwyer emphasizes the importance of monitoring the economy and market conditions before making investment decisions.

Overall, Dwyer urges caution and strategic planning when navigating the current market environment. He emphasizes the importance of staying informed about economic indicators and potential policy changes by the Federal Reserve. By considering the broader market trends and potential impacts of rate cuts, investors can position themselves more effectively to take advantage of opportunities and navigate potential risks in the market.

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