ORLANDO, Florida, Nov 6 (Reuters) - The global

interest-rate cutting cycle has likely peaked. The question now

is when, or if, today's high-flying markets will start to feel

the pinch.

Remarkably, there have been more rate cuts around the world

in the last two years than during the 2007-09 Global Financial

Crisis, according to Bank of America. Although that's the number

of cuts and not the magnitude of easing, it reflects the scale

of the historic inflation-fighting rate hikes in 2022-23.

But the cycle now appears to have turned. This doesn't mean

global easing has stopped. Central banks - most notably the U.S.

Federal Reserve - are still expected to cut further. Rather, the

number of cumulative cuts will decline moving forward.

On the face of it, the end of super-easy monetary policy

should mean less accommodative financial conditions ahead.

But, perhaps counterintuitively, history suggests otherwise.

Peaks in the last three major global easing cycles were followed

by a broadening of the earnings cycle and solid equity market

gains.

Are we about to see this again? Maybe, but given the frothy

valuations in many of today's markets, it's not a given this

time around.

LESS CONCENTRATION, MORE ROTATION

The peak of the easing cycle could be a bullish signal for

Wall Street, say analysts at Societe Generale, who argue that it

is a sign that earnings growth is going to broaden out and

accelerate.

Manish Kabra, head of U.S. equity strategy at SocGen, says

the cycle peak is a "powerful signal" to diversify into other

areas of the market like small caps and less levered stocks. He

notes that reducing equity exposure would typically come later

when investors start pricing in the start of the hiking cycle.

"When the easing cycle peaks, it's traditionally a sign of

market conviction that earnings growth is going to accelerate,"

Manish says, pointing to previous "peaks" in August 2020 and

September 2009 - which were both followed by strong equity

performance.

Of course, there's a big difference between now and these

episodes, namely today's stock prices and valuations. Wall

Street was only beginning to emerge from historic crashes in

September 2009 and August 2020, whereas now it has never been

higher.

This might suggest that a more defensive risk profile may be

warranted today.

Kabra downplays talk of bubbles, however. S&P 500 earnings

growth this year is running at around 12%, but if you exclude

'AI boom' stocks, that falls to only 4%.

IT ALL COMES BACK TO LIQUIDITY

Almost every major asset class has risen this year, apart

from oil, the dollar and some long-dated bonds. Even unloved and

much-maligned U.S. Treasuries have gotten a bounce.

But globally, these rallies have had many different drivers.

In equities, the AI boom has been rocket fuel for Wall Street,

bets on a defense spending splurge have boosted European stocks,

and the prospect of significant fiscal easing has lifted stock

prices in Japan and China.

However, the unifying force that has lifted all these boats,

according to Standard Chartered, is liquidity. And plenty of it.

Eric Robertsen, the bank's global head of research and chief

strategist, says the broad rally from the April lows, impacting

stocks, bonds, commodities and cryptocurrencies, can be deemed a

'financial conditions trade'. How else can nearly every asset

class rise together in a world of extreme economic and

geopolitical uncertainty?

Of course, 'liquidity' is not solely or even primarily a

function of monetary policy. Bank reserves, the availability of

and demand for private sector credit, and general risk appetite

are key factors that contribute to the rather amorphous concept

that is 'liquidity'.

But if interest rate changes can be viewed as a loose proxy

for liquidity or at least a directional signal, then we are at

an inflection point.

Robertsen posits that the "abundant" liquidity from well

over 150 rate cuts in the last 12 months has more than offset

investors' concerns over growth. Their risk appetite may be put

to the test if the liquidity taps are being turned off, even if

only gradually.

"Can markets thrive at this altitude without additional

oxygen?," Robertsen asks.

We may be about to find out.

(The opinions expressed here are those of the author, a

columnist for Reuters)

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