Market expectations for a March Federal Reserve rate cut have moderated recently, with the CME FedWatch tool showing only 57% of investors now anticipate a cut at the March FOMC meeting, down from 71% a month ago.

Yahoo Finance's Josh Schafer break down the details.

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Editor's note: This article was written by Angel Smith

Video Transcript

MADISON MILLS: Now that we've got the latest numbers for the CME FedWatch tool showing investor bets placing roughly 50% chance of Fed cuts coming in March. That is down from 67% last week and 71% about a month ago. Now as cuts come into question, investors becoming more wary of interest rate-sensitive sectors.

So for more on this, we're going to bring in our own Josh Schafer. And, Josh, we were just talking about this but those traditional plays that tend to perform well or badly when interest rate hikes are higher, that's not necessarily playing out how it does historically.

JOSH SCHAFER: So we've kind of had the reverse of the rally that we had over the last two months, right, when you take a look at the action that we've seen in the market to start '24, when you just think broadly, it was small caps are ripping, right? Financials are ripping. And utilities are going up. Real estate is going up. We'll just take a look at the market action today alone, as we're thinking about people sort of coming back on those March rate cuts, maybe the rate cuts come later, maybe we don't get as many cuts, you've got utilities down almost 2% and real estate almost down 2%, the two biggest laggards in the S&P 500 today. And it just seems like, overall, we're seeing people sort of step off those bets.

Now one interesting thing to point out with that, though, is as we're stepping off the rate cut bets in March, it comes with relatively good economic data. The GDP now forecasts coming out today after retail sales projecting 2.4% GDP growth. You can see how it's moved up over the last couple of weeks there.

And I thought Neil Dutta over at Renaissance Macro had a really good point with that. Well, if we're having rates move on good data, that's overall a good thing for stocks in the long run, right, because good data would mean good earnings, and good earnings would mean good things for stocks. So it sort of gets to the fact that overall maybe we just need to wait a little bit. Like, maybe the trade is still there. It's just we got a little bit over our skis. And now we have to just let the dust settle and see where it goes.

JOSH LIPTON: How much do you think, Josh, this is? And we've talked about this, just folks kind of trimming some of their winners here, because we've had strategists come on and say, listen, I like small caps, I still like small caps, but I'm booking some of my profits.

JOSH SCHAFER: Yeah, no, definitely. I talked to Keith Werner over at Truist a little while ago. And he said when you have markets rip the way they did to end the year, you have to expect a little bit of choppiness at some point. It's going to happen. But he had highlighted at the beginning of January, and he said he's still standing by the call now, if you wanted to buy small caps as they were sort of rising at the end of the year, well, now might be your time to buy them, right, because they're well off, the highs that we saw at the end of December.

If you look at the Russell 2000 over the last three months, we're basically back to where we were right before that Fed meeting, right before Powell said, all right, go buy the soft landing stocks. We basically have the Russell 2000 back at that level. And he pointed to now is kind of a key point for that narrative. If we're going back to those levels, we know a little bit of technical analysis, we love to test those levels, right? Do we go lower? Or do we bounce back up?

And so that's going to be a key thing to watch I think in the next couple of weeks guys as we get towards some of these moving averages is-- is there people looking to buy the Russell as it comes back down, buy small caps, buy some of those interest rates sensitive sectors? Or is no one looking to buy it and we keep selling and the narrative shifts a little bit? But for now, narrative not changed yet. Just-- we're waiting, we're waiting to see if the narrative--

MADISON MILLS: I love all the notes that we get, Josh. Everything says the narrative is not changing, but also we think maybe the Fed is not going to cut rates when we say they are. So it kind of is--

JOSH SCHAFER: There's always uncertainty, right? There's always uncertainty.

MADISON MILLS: Awaiting more data, as Jay Powell would say.