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Markets rejoice at the hint of rate relief
Markets ended the week on a high note thanks to Fed Chair Jerome Powell’s much-anticipated speech at Jackson Hole. After losing ground for most of the week, the S&P 500 rallied over 1.5% on Friday, lifting the index just shy of an all-time high close. Energy, real estate, and financials led the gains, while tech-heavy Nasdaq finished lower, weighed down by profit-taking after its recent hot streak. The mid-cap and small-cap indexes also posted solid returns.
Powell hinted that the Fed may be ready to cut rates as soon as September, potentially moving the policy rate lower by 0.25%. Markets loved the idea. Bond yields dropped, interest-rate-sensitive sectors jumped, and the probability of a September cut rose from 75% to 89%. Investors are now pricing in two cuts this year, September and December, with more to follow in 2026. As Powell put it, the Fed is stuck between “inflation that just won’t quit” and a labor market showing early cracks.
The economic backdrop remains mixed. Inflation may tick higher in the short-term thanks in part to tariffs, but Powell suggested it could be a one-time bump. The labor market is showing some fragility. Most recently, initial and continuing jobless claims rose above expectations, and unemployment is likely to rise again in August.
Manufacturing, however, delivered surprising strength, with PMI at a 39-month high of 53.3, suggesting better-than-expected output. The catch is that tariffs are driving input costs up at the fastest pace since 2022. Costs coming to a retailer near you in Q4/Q1.
Retail earnings also told a mixed story but showed resilience. Walmart, Target, and Amazon reported mostly positive results, albeit with tariff and consumer spending risks. Home Depot and Lowe’s saw continued spending on small home projects, but couldn’t pull off beats on revenue. Retailers admitted tariffs are pushing prices higher, but many absorbed costs or passed them on selectively for now. In short, the U.S. consumer is still shopping but increasingly on the hunt for bargains.
Elsewhere, oil bounced after last week’s dip, gold clawed back some losses, and bitcoin once again reminded investors that it moves to its own rhythm.
What this means for investors
Volatility is likely in the coming months as inflation and labor data remain murky, but Powell’s speech gave investors what they wanted: hope for rate cuts. For investors, that means leaning into quality equities, keeping an eye on sectors sensitive to rates, and viewing any market pullbacks as opportunities rather than warnings. We’ve all heard the term “data dependent” from Powell enough, so maybe you should be too.
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Jackson Hole was the only economic event that mattered this week. It seems like rate cuts are all but a done deal, so let’s hope inflation doesn’t surprise to the upside and spoil the party.
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Our God-King Jensen Huang (First of His Name, King of the Andals and the Rhoynar and the First Men, Protector of the Seven Kingdoms, Father of Dragons, Signer of Bras, Keeper of the CUDA Codex, Breaker of Records), may he rule for a thousand years, is up for earnings on Wednesday. As a $4T company, the index lives and breathes Nvidia results. At the current price, there isn’t much room for error. There are sure to be some questions about China, the Trump Administration deals, AI-spend trends, and the future of the sector.
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Chart(s) of the week
Productivity finally broke out to all-time highs which is excellent and one of the reasons earnings are pushing higher. But unless it is evenly distributed to the smaller (S&P 493 & Russell 2000) companies it won’t be enough to carry this AI-wave to it’s dreamt of conclusion. If small and mid-size companies aren’t seeing benefits, efficiencies, and/or higher profits then the investments are going to stall out. The Mag 7 can’t just keep patting each other on the back forever. A crisis of faith will knock the indices lower.
Inflation spiking in 2022 is still hanging over most workers who haven’t seen their wages return to an inflation-adjusted high yet. Per Bankrate’s analysis, the pace of wage gains will require another full year of catch-up. Four industries are beating the odds, but most lag behind. RIP education.
Source: Bankrate Wage-to-Inflation Index data
A curious deviation from the search/claim trend is worrisome that another shoe could drop with the labor market. We’re seeing increasing searches for unemployment that aren’t matched by claims. Is this due to the delayed Federal Government layoffs/severance?
Source: Rob Berger
Pace of market returns following a “Breadth Thrust” event is already positive. We’re exceeding the typical return following these events. Layering rate cuts on top of these trends offers strongly positive precedent. From Ryan Detrick:
“The good news is rate cuts near all-time highs have seen stocks higher a year later 20 out of 20 times and when last year’s cuts reach the one year mark, we could have 23 out of 23. In other words, if the Fed cut rates in September and the S&P 500 is still be near new highs, it could be another positive driver for stocks.”
Source: Willie Delwiche, Hi Mount Research
Related: Why Wall Street’s Rally Is Ignoring Inflation, Tariffs, and the Fed