Investors are beginning to adjust their interest rate cut expectations, with many pushing back their initial forecasts to much later in the year. But it's not just the Federal Reserve driving the markets. Earnings are now expected to take their turn in the driver's seat.

Roundhill Investments CEO Dave Mazza joins The Morning Brief to give insight into investing while uncertainty over when the Fed will cut interest rates takes hold over Wall Street.

Mazza elaborates on what investors are looking for when considering investments: "The S&P is off 4% of the all-time high, but people are freaking out, for good reason because it's been a steady path forward in 2023 and unexpectedly in 2024. But this earnings season-- it's cliche to say that every season is important. This is the 'show me the money' earnings season because valuations have increased so much across the market. If earnings don't come, to the extent that people are looking for, particularly from the Magnificent Seven, which has lifted earnings for the broader market, it's difficult to see actually the ability for markets to continue to go higher."

For more expert insight and the latest market action, click here to watch this full episode of Morning Brief.

This post was written by Nicholas Jacobino

Video Transcript

SEANA SMITH: Cleveland Fed President Loretta Mester expecting rate cuts at some point this year, but couching the timing just a bit saying, quote, "We will start to normalize policy back to a less restrictive stance, but we don't have to do that in a hurry." So let's talk about what we could expect going forward for that. We want to bring in Dave Mazza joining us here at the desk, Roundhill chief executive officer.

Dave, it's great to have you here. So, where do you stand? We've been talking all morning about where everyone else stands on rate cuts. What's your base case? And how important do you think it is to the market's momentum?

DAVE MAZZA: Yeah. And the second part of your question is really interesting here. So we saw the Powell pivot last year has become the Powell divot because we cannot get out of this scrooge of inflation, particularly when we think about sticky prices versus flexible prices. And so the Cleveland Fed has great measures where they categorize inflation categories into those areas to say, hey, what actually historically has a lot of volatility and what doesn't?

The problem is the sticky prices aren't supposed to be this high. And so that makes for a very difficult job for the Fed. When we think about going forward, obviously, June is well off the table. July, maybe, but I think that's unlikely and it's been pushed out.

The challenge is we know the Federal Reserve doesn't want to be seen as influencing the election, and that's coming in November. So maybe we could get that September cut. But at the end of the day, it's all going to depend on where inflation lands. And right now that picture does not look very positive.

BRAD SMITH: And so, with that in mind, I mean, a lot of people are trying to figure out what that means for their portfolio strategy now if you're pushing out the pacing of those cuts and even looking into-- we had a guest already say we might not even see it until late 2025. So, what does that mean for the portfolio strategy in the interim here?

DAVE MAZZA: So our base case is that we do actually get some cuts this year, probably one in September. That's an interesting argument to be made about that 2025 because if inflation does stay high, it's going to be hard for them to do that. However, it is clear that only recently has the market picked up on the fact that-- the equity market, I should say, picked up that rate cuts may not happen.

But what's interesting this time around is that unlike the hope for cuts that we saw during the COVID period, the economy is actually much stronger. And that's also confounding to investors and really actually confusing for economists because everyone was expecting that we would see a material slowdown particularly in jobs growth. It hasn't happened yet. So now there's not necessarily a reason for the Federal Reserve to move as soon as many had expected.

SEANA SMITH: So Dave, then when it comes to the market's momentum, the pressure is really on earnings, right? To live up to expectations given where valuations are. Yes, we have fallen in the last couple of days.

But overall sentiment-- we're not too far from those all-time highs. Do you expect earnings to live up to those expectations? And then further than that, if we do see any sort of disappointment, particularly from the Mag Seven, how worrisome is that going to be?

DAVE MAZZA: Yeah, it's really interesting. So markets are, you know, S&P is off 4% of its all-time high, but people are freaking out for good reason because it's been really a steady path forward in 2023 and unexpectedly in 2024. But this earnings season, it's cliche to say that every earnings season is important.

This is the "show me the money" earnings season because valuations have increased so much across the market. And if earnings don't come to the extent that people are looking for, particularly from the Magnificent Seven, which has lifted earnings for the broader market, it's difficult to see actually the ability for markets to continue to go higher.

But if they beat, and particularly out of these big companies-- Netflix, not a Magnificent Seven name but certainly going to be important, at least for sentiment, particularly with Tesla reporting next week-- then I actually think we can see markets regain their footing even-- and actually propel higher even with some of the negative macro headlines.