**Daily Market Recap:**
• Equity markets started the day higher, boosted by solid earnings by Microsoft, but pared gains after the Fed reaffirmed its hawkish stance. The Fed signaled it would begin raising interest rates in March and shrink its bond holdings after liftoff has started. In recent weeks, the tech-heavy Nasdaq outperformed today after leading the indexes on the downside. Yet investor anxiety and volatility remain high as policy shifts to combat inflation. The 10-year Treasury yield rose following the Fed meeting, as did the U.S. dollar. Oil finished higher for the second day, supported by the ongoing Russia – Ukraine political tensions.
• In light of the recent volatility, all eyes were on the Fed this afternoon as it looks to normalize policy. The committee kept rates steady but set the table for the firstm0tkhate hike and the end to quantitative easing (bond-buying) in March. With inflation running at an almost 40-year high and the unemployment rate falling below 4%*, the Fed has made a „hawkish“ pivot. Today’s meeting served to prepare the markets for the policy actions ahead. The Fed also communicated its plan to reduce its near $9 trillion balance sheet after it begins raising rates, but Chair Powel gave no hint on when that might start. With upside risks to inflation, Chair Powell at the press conference did not rule out hiking rates faster by moving at every meeting, which spooked the market. However, we are not convinced that the Fed will tighten more aggressively than what the market is already pricing in, which is four hikes this year.
• After a lousy start to the year, with the S&P 500 experiencing its first correction in almost two years, market sentiment remains fragile. The prospects of tightening monetary policy have triggered an adjustment to valuations across the board, with speculative investments and non-profitable, high-growth stocks bearing the brunt of the sell-off this year. While upcoming Fed rate hikes are likely to continue to weigh on valuations, we believe that this headwind can be offset by rising corporate earnings, as has happened historically. In each of the last five Fed tightening cycles since 1985, the S&P 500 generated moderate but positive returns between the first rate hike and the last, supported by a growing economy and rising earnings*. Given the pent-up consumer demand for services, a strong labor market, household financial conditions, and the ramp-up in buybacks, we expect corporate earnings to continue to rise despite the likely peak in profit margins. Elevated volatility could persist, but given the still-solid fundamental backdrop and not yet restrictive Fed policy, the recent pullback and any further potential weakness could present a compelling opportunity for investors, in our view.

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