Despite expectations of a slowdown in the U.S. economy toward the end of 2024, Wells Fargo does not foresee a recession.

The Federal Reserve recently surprised many investors by reducing interest rates by 50 basis points, bringing the federal funds rate to a range of 4.75% to 5%.

Wells Fargo analysts believe this rate cut marks the beginning of a series of reductions that could create broader market opportunities in 2025.

They predict that the central bank will continue to cut rates by 25 basis points at the remaining Federal Open Market Committee meetings in November and December, totaling 100 basis points of cuts in 2024.

These anticipated rate cuts are expected to support economic growth and labor markets, despite conflicting economic indicators.

While retail sales have performed better than expected, the manufacturing PMI has fallen to its lowest level in 15 months.

Fed Chair Jerome Powell emphasized the need to maintain a stable labor market and avoid further deterioration in employment conditions as the Fed shifts focus from controlling inflation to addressing rising unemployment.

Wells Fargo anticipates a moderate economic slowdown before the effects of the rate cuts positively influence growth.

Market predictions suggest that the Fed's rate-cutting initiative may continue through 2025, with some traders expecting rates to fall to between 2.75% and 3% by December 2025.

The Fed has indicated potential for further rate cuts, with a more aggressive trajectory than previously forecasted in June.

By early to mid-2025, Wells Fargo expects the domestic economy to respond favorably to the easing cycle, significantly benefiting earnings.

In this low-rate environment, seven major large-cap banks are favored, which may boost capital markets revenue and fee income growth.