• Investors hoping the Fed will pare interest rates in March will be disappointed, Kevin O'Leary says.
• Inflation still exceeds the Fed's target rate of 2%, likely ruling out any immediate cuts, he says.
• The "Shark Tank" star sees a 50%-plus chance of a soft landing, but worries about small businesses.

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Investors banking on the Federal Reserve cutting interest rates soon are bound to be disappointed, Kevin O'Leary says.

"The market would love the Federal Reserve to do a series of cuts, even starting in the first quarter," the "Shark Tank" star recently told Fox Business. "The March cut isn't gonna happen."

O'Leary — whose nickname is "Mr. Wonderful" — emphasized the Fed's mandate is to bring inflation down to 2%. Core inflation, which excludes volatile food and energy prices, rose by at least 4% in the 12 months to November, meaning the central bank hasn't achieved its goal yet.

"The idea that they would sit up there at 4.1% ... and actually do any kind of a cut in March I think is a dream, it's just a fairy tale at this point," O'Leary said. He attributed the dip in stocks this year to investors realizing "the Fed won't be cutting as fast as anybody thinks."

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Pandemic stimulus measures and supply-chain snarls fueled a spike in inflation to 9.1% in the summer of 2022, a 40-year high. The Fed has reacted by hiking rates from virtually zero to over 5%, as steeper rates encourage saving over spending and raise borrowing costs, which typically relieves upward pressure on prices.

However, higher rates tend to weigh on stocks and other risky assets, as larger, guaranteed yields from safe assets like Treasury bonds entice investors to hold those instead. They also raise the risk of a recession by deterring spending, hiring, and investing.

Yet the US economy grew nearly 5% in the third quarter of 2023, unemployment has remained at historic lows of below 4% for months, and the benchmark S&P 500 and Nasdaq Composite indices gained 24% and 44% respectively last year. At the same time, inflation has moved closer to the Fed's target rate.

Given the relatively strong backdrop, "the probability of a soft landing remains at least 50-50," O'Leary said. However, he warned that many US small business are struggling in the face of steeper borrowing costs and reduced access to credit, as regional banks have pulled back after a trio of lenders failed last spring.

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"The cracks are showing there first," he said.

Other experts have also raised the alarm, warning investors to brace for trouble. Veteran economists like David Rosenberg and Gary Shilling have pointed to the inverted yield curve, shrinking money supply, and declines in leading economic indicators as signs that stocks are poised to fall and a recession will probably strike.