Anticipation of a Federal Reserve rate cut is gathering momentum, but analysts at JPMorgan caution that the underlying forces driving a potential cut could spell trouble for investors.

Market Concerns Rise Over Potential Fed Rate Cuts Impact. JP Morgan building is seen in Central financial district, Hong Kong.

According to a note cited by BlockBeats, Mislav Matejka and JPMorgan’s London-based strategy team highlighted that markets have already priced in an additional 18 basis points of rate cut expectations in recent weeks. Yet the question is less about if the Fed will act, and more about why.

The bank laid out three possible scenarios:

• A pronounced economic slowdown: In this case, the Fed would be compelled to ease policy to cushion falling growth. This scenario could rattle confidence and hurt corporate earnings.

• A ‘Goldilocks’ soft landing: Economic growth stays resilient while inflation moderates, reducing pressure on consumer spending. This outcome is seen as the most constructive for markets.

• Persistent inflation combined with cuts: Here, the Fed may proceed with cuts despite lingering price pressures, potentially influenced by fiscal considerations or political dynamics.

JPMorgan strategists expect the outlook will likely be a blend of the first and third scenarios—slowing activity coupled with stubborn inflation—a mix that could leave investors underwhelmed.

“If this materializes, the market’s optimism around cuts could quickly reverse,” the team warned.

Historically, the dollar has tended to weaken in the run-up to rate cuts and continued to decline afterward, dating back to 1980. Bond yields also typically fall as expectations of looser policy take hold. In line with these trends, JPMorgan expects the dollar to slide to new lows and U.S. bond yields to keep drifting down.

The firm’s cautious tone underscores a broader debate on Wall Street: whether monetary easing can sustain equity valuations when economic fundamentals are deteriorating.