Federal Reserve Governor Michelle Bowman signaled her support for the central bank to cut interest rates as inflation eases in a statement on Monday, while also warning that risks persist. This echoes a similar sentiment from Fed Chair Jerome Powell who stated back in December that rates most likely would be cut but remains cautious. Yet, the market seems to already be pricing in multiple rate cuts.

SEI Chief Investment Officer Jim Smigiel joins Yahoo Finance to discuss why the stock and bond markets seem to have priced in so many interest rate cuts from the Fed.

"It's a repeat of 2023... If we wind the clock back 12 months, we're in the same position: The market had Fed cuts priced in," Smigiel says. "I think myself and a lot of other talking heads were saying the same thing, we don't see cuts in 2023. We didn't get cuts in 2023. We actually saw additional hikes, and the market didn't care."

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Editor's note: This article was written by Nicholas Jacobino.

Video Transcript

JULIE HYMAN: You know, Jim, just using sort of anecdotal evidence, you are among many, many people who we've spoken to in the past few weeks who have been saying this same thing. Why is the market still pricing in as many cuts as it is when seemingly everybody we talk to doesn't think they're gonna cut that many times?

JIM SMIGIEL: I think that's a great point, Julie. And to be honest, it's the same thing as-- it's a repeat of 2023. If we recall, if we wind the clock back 12 months, we were in the same position. The market had Fed cuts priced in.

I think myself and a lot of other talking heads out there were saying the same things if we don't see cuts in 2023. We didn't get cuts in '23. We actually saw additional hikes. And the market didn't care. The market rallied 20% based on a lot of other factors, such as the AI fever that you were talking about earlier.

So, you know, I think it's a great question, which is, what does the bond market see? And there's a few different ways to look at it. The bond market, quite frankly, might be a bit more negative than the equity markets, not necessarily expecting this soft landing.

The bond market might be looking at it from a stimulus standpoint to expect a little bit of a downdraft in economic activity that really equity investors don't seem to be pricing in at this point in time. There is a lag to monetary policy. There's a broader lag to monetary policy this cycle just given where we started from with corporate balance sheets in great shape, with debt termed out.

I think the bond market has a little bit more of a negative overtones to it and are thinking that, you know what, this isn't gonna be a perfect kind of scenario. And there could be bumps along the way, not mentioning the fact that from a supply and demand perspective, quite frankly, we have a lot of debt. We have to float in 2024. So I think there's a little more. There's dual personality. Equity markets are very, very positive.

I think the bond market, you're seeing that skepticism. And the cuts that are priced in are actually stimulus cuts and not actually this idea of normalization cuts, which is allowing these valuations in equity markets to be maintained at these levels.

JOSH LIPTON: And Jim, investors, of course, pay attention to the Fed. They also pay attention to corporate earnings. Earnings season is now upon us here. What are your expectations for this earnings season, Jim? And do you think it-- could it be a positive catalyst for the market?

JIM SMIGIEL: It's a great point. And it gets back to some of the earlier comments that we're talking about, double digits earnings growth priced in for 2024. Honestly, we're gonna take the under on that one.

You know, I think there's a lot of early warnings that are coming, that we're seeing from economic growth, from small businesses that leaves us, quite frankly, a bit skeptical that we're gonna be able to reach these kind of lofty levels that we see baked in the cake at this point.

And given that they are baked in, you know, that's also gonna give you a sense as to what we see from an equity market perspective, very much sideways kind of range bound trading this year. And you know, I wouldn't say we're outright negative calling for a downdraft, although it wouldn't surprise us to see that certainly in the second half of the year. But we're certainly not expecting anything resembling what we saw over the prior 12 months.