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Fed expected to pause easing cycle on Wednesday

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S&P 500 hits record high this week

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Stocks digesting flood of Trump actions, tariffs in focus

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Earnings due next week include Apple ( AAPL ), Microsoft ( MSFT )

By Lewis Krauskopf

NEW YORK, Jan 24 (Reuters) - The Federal Reserve's first

meeting of 2025 in the coming week stands to test the resurgence

in U.S. stocks as investors gauge the extent of more

equity-friendly interest rate cuts in the months ahead.

Stocks swooned after the Fed's last meeting in December,

when the central bank downgraded its forecast for rate cuts as

it braced for firmer inflation this year.

Since then, monthly data that showed underlying inflation

moderated set off relief on Wall Street, helping drive a rebound

in stocks with the benchmark S&P 500 hitting a record

high this week.

The Fed is broadly expected to pause its easing cycle when

it gives its monetary policy statement on Wednesday, with

investors instead focused on "what would need to happen for them

to start talking about resuming the rate cuts," said Angelo

Kourkafas, senior investment strategist at Edward Jones.

Given recent data indicating strong economic activity,

Kourkafas said, "there's wide expectations that the Fed has no

urgency to continue cutting until we get potentially more

encouraging inflation data."

The Fed's benchmark rate stands at 4.25% to 4.5% after

the central bank lowered it by a full percentage point last

year. The Fed's easing cycle began after rate hikes had helped

bring down inflation from 40-year highs, although it remains

above the Fed's 2% annual target.

Fed funds futures are pricing in about 40 basis points more

of easing -- or nearly two more cuts -- by December, according

to LSEG data.

Morgan Stanley economists expect Fed Chair Jerome Powell

will keep the possibility of a cut at the Fed's March meeting

"on the table."

"If we are right in our assessment of the incoming data

flow, then we think the Fed can stay on hold in January and

retain its easing bias," the Morgan Stanley economists said in a

note.

Meanwhile, President Donald Trump said on Thursday he wants

the Fed to cut rates, even as the central bank is expected to

pause for an uncertain duration.

Stocks have started the year strongly, with the S&P 500 up

about 4% so far in January, following back-to-back years of

gains of over 20%.

Investors this week digested a flood of activity by Trump

after his second term began on Monday, including his

announcement of private sector investment in artificial

intelligence infrastructure that propelled a broad tech stock

rally.

Some investors were surprised that Trump has not yet moved

to enact new tariffs on foreign imports, a key part of his

expected agenda that could set off broad market volatility. The

president, however, is threatening an array of tariffs, which

continues to keep investors on edge about the potential to

increase inflation.

With the Fed meeting for the first time since Trump's

presidency, the possibility of tariffs could factor into the

central bank's outlook, said Larry Werther, chief U.S. economist

of Daiwa Capital Markets America.

"If there's any hint that the Fed is perhaps taking a more

solid view on tariffs... and it's unfavorable how they're

viewing it with respect to potential inflationary pressures, I

think it could potentially be a negative for equities," Werther

said.

Stocks will also take their cues in the coming week from a

slew of earnings results, especially from megacap tech

companies. Reports are due from Apple ( AAPL ), Microsoft ( MSFT )

, Facebook owner Meta Platforms ( META ) and Tesla

-- four of the "Magnificent Seven" companies whose

shares have led equity indexes higher over the past two years.

The Magnificent Seven in general have put up stronger

earnings growth than the rest of the S&P 500, but their

valuations are also higher. The group trades at an average

forward price-to-earnings ratio of 43 times expected 12-month

earnings, and a median of 31.5 times, compared to 22 times for

the S&P 500, according to LSEG data.

"If we start to see the Mag 7 struggle to meet some of these

lofty expectations, we wouldn't be surprised to see if the

valuations take a meaningful hit," said Michael Reynolds, vice

president of investment strategy at Glenmede.