The wrong kind of Fed rate cuts are coming, says JPMorgan. What that means for stocks, bonds and the dollar.

The market is getting increasingly excited about the possibility of interest-rate cuts from the Federal Reserve, but London-based strategists at JPMorgan say the reasons behind the reductions are not likely to be supportive for stocks.

Strategists led by Mislav Matejka say an extra 18 basis points of Fed easing was built into markets over just the last few weeks. But they say there are three types of cuts:

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The strategists are expecting some combination of the first and third scenarios — where activity is slowing down but inflation picks up.

“If this outlook gains traction, we think that investors will be disappointed,” the strategists say.

They note that since 1980, there have been six instances when the Fed restarted the easing cycle after a pause. Typically, the dollar DXY weakened into the cuts, and kept falling afterwards. Bond yields BX:TMUBMUSD10Y also moved lower. The JPMorgan strategists say they expect the U.S. dollar to make new lows in most scenarios and for U.S. bond yields to move lower.

Historically, emerging-markets stocks EEM perform well when the Fed eases, and JPMorgan is reiterating its overweight on the region after caution for several years. By contrast, they expect European equities to stall for a while longer.

Looking at both U.S. and European stock-market performance, staples , healthcare, utilities and technology tend to perform better while industrials and financials lagged in scenarios where the Fed cuts after a long pause.

The S&P 500 SPX finished at a new record high on Friday, but its 5% advance this year is underperforming Europe. One leading ETF, the Vanguard FTSE Europe VGK, has gained 21% this year.

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