(Bloomberg) -- Investors who are selling stocks because the Federal Reserve may scale back plans for interest rate cuts are missing the point. The move would be a good sign for the economy — and therefore equity markets, according Morgan Stanley Investment Management’s Andrew Slimmon.

“I think a patient Fed validates that the economy is strong,” Slimmon told Bloomberg Television on Tuesday in an interview. “That’s better for equities.”

Slimmon is worth listening to, as he was correctly optimistic last year while the S&P 500 Index soared 24%. By contrast, his highly publicized Morgan Stanley colleague Mike Wilson, the firm’s leading sell-side strategist, repeatedly called for a rout that never materialized.

After the strongest first quarter since 2019, US equities are starting April on a downbeat note as a wave of strong economic data renews concerns that the Fed will be in no rush to loosen policy. In fact, investors are now more hawkish than central bankers, projecting about 65 basis points of rate cuts this year, compared with the 75 basis points signaled by the median estimate of projections released following the Fed’s March meeting.

Traders have recalibrated their expectations for rate reductions throughout this year, dialing back bets to around three reductions from six at the start of 2024. But the S&P 500 still rose over 10% in the first quarter.

The need for fewer cuts is generally reason for optimism, Slimmon said. Zero rate cuts this year would signal to him that S&P 500 earnings estimates for 2025 can start between $275 and $280, which “validates upside for equities,” given the market will look ahead to those projections.

“I think they would be forced to cut rates if the economy weakens,” he added, something that would pressure earnings estimates for the coming year.

The risk to this sanguine view is elevated oil prices could pressure stocks in the near term. Slimmon expects the recent spike in commodities to be temporary. But if the Fed doesn’t cut interest rates because oil prices stay higher, that isn’t a sign of economic strength.

“That’s an inflation problem,” he said. “That’s a concern.”

--With assistance from Manus Cranny.

©2024 Bloomberg L.P.