The Market Now Expects a Rate Hike. Louis Disagrees

• Navellier believes energy-driven inflation is temporary and resolvable, noting Iran's oil infrastructure damage creates incentives for conflict resolution, while AI productivity gains represent a structural deflationary force not yet captured in current data
• Treasury Secretary Scott Bessent and incoming Fed Chair Kevin Warsh share this 'Team Transitory' view, with Warsh planning to cut rates while shrinking the Fed's $6.7 trillion balance sheet later in the year
• Historical patterns show smaller-cap domestic stocks significantly outperform during Fed rate-cut cycles, with past examples including Cisco gaining 2,062% in 1995 and MARA Holdings rising 1,800% in 2020

Summary

Market Shift on Interest Rates

Market expectations have dramatically reversed in five months: from anticipating two rate cuts at year-start (with the first in April) to now pricing in a 34% probability of a rate *hike* by December 2025, rising to 53% by April 2027, according to CME Group's FedWatch Tool.

Inflation Data Driving Change

Recent inflation prints spooked markets: CPI reached 3.8% year-over-year (a three-year high) and PPI jumped to 6.0% (highest since December 2022). These figures collapsed rate-cut expectations and prompted hike speculation.

Navellier's Contrarian View

Legendary investor Louis Navellier, editor of *Breakthrough Stocks*, disagrees with hike expectations, arguing:

• Current inflation is energy-driven (Iran conflict impacting diesel, jet fuel, shipping costs), not structural
• Iran faces incentives to resolve conflict due to oil infrastructure damage
• AI-driven productivity gains represent a "significant disinflationary force" not yet captured in data
• S&P 500 earnings growth at 20% this quarter; stocks provide inflation hedging

Policy Support

Treasury Secretary Scott Bessent called current inflation "Team Transitory," believing it won't embed into expectations. Incoming Fed Chair Kevin Warsh shares the AI productivity thesis. Council of Economic Advisers head Kevin Hassett projects 6% GDP growth from AI-led productivity and energy exports.

Investment Strategy

Navellier is positioning for eventual cuts, not hikes, citing historical precedent: smaller-cap, domestically focused companies deliver outsized returns during Fed rate-cut cycles (examples: Cisco +2,062% in 1995; MARA +1,800% in 2020).

Bottom Line: While markets bet on hikes, Navellier sees temporary energy-driven inflation offset by AI productivity gains, maintaining his rate-cut positioning.