Strong retail sales and a robust labor market have cast doubts on the Federal Reserve’s plans for rate cuts.

Economists are now anticipating fewer rate cuts than initially expected, with some forecasting none at all.

Michael Darta Rothstein, Chief Economist at Morgan Stanley, believes the Fed is unlikely to ease monetary policy until there’s clear evidence of an economic slowdown and moderating inflation.

He warns that the Fed risks being behind the curve if it waits too long.

However, Rothstein also points to potential downside risks in the economy, including a surge in uncertainty due to factors such as escalating geopolitical tensions and a downturn in earnings.

He suggests a pullback in the stock market of 15-20% is not unreasonable, given the elevated valuations and suppressed volatility.

Rothstein advises investors to consider defensive sectors for their portfolios, such as utility stocks.

He cautions against chasing highly valued sectors like consumer discretionary and technology, which have been strong performers but now face lofty expectations.

Fed rate cuts less likely due to strong economic indicators.

Strong retail sales and a robust labor market have cast doubt on the Fed’s initial plans for rate cuts.

Potential for economic slowdown and moderating inflation, but also downside risks.

Michael Darta Rothstein warns of potential economic risks such as geopolitical tensions and a downturn in earnings, suggesting a 15-20% pullback in the stock market is possible.

Sector allocation strategy: Defensive sectors preferred over high-growth sectors.

Rothstein recommends considering defensive sectors like utility stocks while avoiding sectors with lofty expectations like consumer discretionary and technology.