Inflation 💸. Interest rates💰. Economic growth 📈. For the past few quarters, these factors in the US economy have remained higher-for-longer1. Despite robust economic performance, several factors, including interest rates and sentiment, could impact growth in the remainder of 2024. In this analysis, we explore various scenarios and their potential effects on key indicators: the S&P 500 Index, US 10-year treasury yield, Crude Oil Price, and DXY (US Dollar Index) relative to their levels on June 26, 2024.
Scenario 1: Higher-for-longer rates + strong economy (30% probability)
Despite elevated interest rates, the economy maintains strength due to broad equity market performance2. Positive sentiment and confidence drive increases in the S&P 500, crude oil prices, and the DXY3.
| S&P 500 Index | 5% increase |
| US 10-year treasury yield | ~4.3% (no change) |
| Crude Oil Price | 90 USD (increase by 10 USD) |
| DXY | 10% increase |
Scenario 2: Higher-for-longer rates + weak economy (15% probability)
High interest rates, coupled with worsening inflation and geopolitical risks, negatively impact consumer and investor sentiment4. This negatively impacts the finances of small firms5, while potentially leading to stock market volatility, reduced borrowing, and market decline6.
| S&P 500 Index | 15% decrease |
| US 10-year treasury yield | ~4.3% (no change) |
| Crude Oil Price | 60 USD (20 USD decrease) |
| DXY | 0% change, stable |
Scenario 3: Lowered interest rates + strong economy (25% probability)
Lowered interest rates, combined with positive sentiment, boost aggregate demand. Increased consumer spending leads to higher profitability, greater investment, and reduced unemployment.
| S&P 500 Index | 15% increase |
| US 10-year treasury yield | ~3.8-3.9% (decrease) |
| Crude Oil Price | 100 USD (20 USD increase) |
| DXY | 5% decrease |
Scenario 4: Lowered interest rates + weak economy (30% probability)
Lowered rates may not significantly improve sentiment. Consumer and business confidence remains low due to inflation concerns, geopolitical risks, and unsustainable debt.
| S&P 500 Index | 7% decrease |
| US 10-year treasury yield | ~3.8-3.9% (decrease) |
| Crude Oil Price | 60 USD(20 USD decrease) |
| DXY | 20% decrease |
Sources:
- “Higher growth, inflation, and rates is the story of the US economy.”, page 3 of UBS The CEO Macro Briefing Book
- “The upward trend in stocks was dented by delayed rate cut expectations and geopolitical risk, but those headwinds are likely to ease”, page 3 of UBS The CEO Macro Briefing Book; “equity market breadth has improved”, page 48 of UBS The CEO Macro Briefing Book
- “A virtuous cycle between consumer spending and the labor market, for now […] Spending and job growth should stay healthy for a while.” page 3 of UBS The CEO Macro Briefing Book
- “The upward trend in stocks was dented by delayed rate cut expectations and geopolitical risk, but those headwinds are likely to ease.”, page 3 of UBS The CEO Macro Briefing Book
- “higher rate environment weighing down smaller firms”, page 13 of UBS The CEO Macro Briefing Book
- “higher-for-longer rates are more challenging for bank borrowers” page 3 of UBS The CEO Macro Briefing Book, “The selloff and market volatility stem from higher rates, geopolitical risks, and investors de-risking portfolios.” page 49 of UBS The CEO Macro Briefing Book
WealthRyse