Markets Navigate Powell's High-Stakes Policy Balancing Act

Good Morning Investors,

The Fed's moment has arrived. After the longest gap between meetings this year, markets are positioning for what could be the most consequential monetary policy shift since the hiking cycle began. The S&P 500 closed Monday at a fresh record above 6,600, extending September's unlikely winning streak as investors bet on dovish policy ahead.

But this isn't just about a 25bp cut that's already priced in. It's about Chair Powell's ability to thread the needle between acknowledging labor market weakness without triggering recession fears, while addressing inflation that remains stubbornly above target.

US equity futures are showing cautious optimism ahead of the Fed's two-day meeting. S&P 500 ($SPY ( ▲ 0.07% )) futures are up 0.2%, Nasdaq-100 ($QQQ ( ▲ 0.21% )) futures advance 0.3%, while Dow ($DIA ( ▲ 0.12% )) futures slip modestly below the flatline. The setup reflects measured confidence rather than euphoria, smart positioning for an event that could swing either way.

Oracle ($ORCL ( ▲ 2.34% )) shares are jumping nearly 5% in premarket after CBS News reported the company is part of a consortium that could enable TikTok's continued US operations. This adds another layer to Oracle's AI infrastructure story that's already driven shares up dramatically.

In fixed income, the 10-year Treasury yield holds near 4.20% as traders await policy signals. The dollar is modestly stronger against major currencies, while gold remains range-bound ahead of the announcement.

Today's economic calendar features retail sales data, with consensus expecting modest 0.2% growth after July's solid 0.5% print. Any surprise, up or down, will help calibrate the Fed's assessment of consumer resilience.

Base Case Confirmed

Fed funds futures show 100% probability of at least a quarter-point cut Wednesday. The data backdrop supports this move: the BLS benchmark revision erased 911,000 jobs from prior estimates, jobless claims hit 263,000 (highest since October 2021), and while August CPI came in at 0.3% monthly, much of the increase was driven by shelter and autos, categories potentially influenced by tariff dynamics rather than underlying demand.

The Communication Challenge

Powell's press conference matters more than the cut size. Recent labor market deterioration gives the Fed cover to ease, but inflation at 3.1% year-over-year leaves little room for dovish error. The chair must acknowledge softening employment without sounding alarmist, while maintaining credibility on the inflation front.

Historical Context Favors Bulls

The only two September cuts following extended pauses (1998 and 2019) both preceded strong equity rallies. Both were "insurance" cuts rather than crisis responses, similar to today's environment where growth remains positive despite cooling momentum.

Google Hits $3 Trillion

Alphabet ($GOOGL ( ▼ 1.06% )) became just the fourth company to reach a $3 trillion market cap, with shares surging over 4% to $252. The milestone caps an extraordinary run, up 70% from April lows, adding $1.2 trillion in value in just five months. The AI transformation thesis is paying dividends: Gemini has 450M+ monthly active users, AI Overview users engage 2x longer than traditional search, and Cloud margins doubled year-over-year.

CoreWeave's $6.3 Billion Backstop

Nvidia ($NVDA ( ▼ 2.21% )) effectively wrote CoreWeave ($CRWV ( ▲ 0.36% )) a blank check, guaranteeing to purchase any unsold cloud capacity through April 2032. This $6.3 billion minimum commitment removes CoreWeave's biggest risk, utilization, while validating their position as mission-critical AI infrastructure. Shares jumped 8% on the news, now valued at over $58 billion.

Tesla's Confidence Signal

Elon Musk's $1 billion share purchase of Tesla ($TSLA ( ▲ 0.09% )) on Friday, his first since 2020, sent a clear confidence signal. The 2.57 million share purchase coincides with Tesla's ambitious compensation package targeting an $8.5 trillion market cap. While fundamental headwinds remain around 2025 demand and brand challenges, the technical picture supports near-term strength toward 407-408 resistance.

Breadth Concerns Lurk Beneath Records

While headline indices hit new highs, market breadth has deteriorated from recent peaks. Equal-weight performance lags cap-weighted indices, and fewer stocks are participating in the advance. This concentration risk doesn't invalidate the bullish case but suggests the rally's foundation needs broader participation for sustainability.

Small Caps: The Cutting Cycle Play

The Russell 2000 remains our preferred overweight into Fed easing, with clear upside toward the 245 level. Historical precedent is compelling: small caps have consistently outperformed in the 12 months following initial rate cuts, particularly when cuts are preventative rather than reactive.

Wednesday: Fed Decision (2:00 PM ET)

Tuesday: Retail Sales

Technical Levels to Monitor

This environment favors measured optimism with tactical flexibility. The combination of approaching Fed easing, resilient earnings, and AI infrastructure investment continues supporting risk assets, even as concentration and geopolitical risks demand attention.

Core Strategy: Equal-weight S&P 500 exposure reduces mega-cap concentration while capturing expected breadth expansion. Small-cap overweight into the cutting cycle, with selective AI infrastructure exposure sized for event risk.

The Historical Edge: When the Fed cuts with the S&P 500 within 2% of record highs, the index has been higher a year later in 20 of 20 cases. September's typical weakness has turned into anticipatory strength, a rare alignment worth respecting.

While the fundamentals support continued strength, I suspect we may see an initial "sell the news" reaction following Wednesday's Fed announcement. Current sentiment skews bullish, and when expectations run this hot, markets often deliver a reality check first.

But here's the key: any post-announcement weakness should be viewed as opportunity rather than warning. The underlying drivers, Fed easing, AI infrastructure demand, and resilient corporate earnings, remain intact. I expect we'll finish the year meaningfully higher than current levels, making any Fed-driven volatility a tactical buying opportunity for patient investors.

Use weakness to add quality exposure at better levels rather than chasing current records. Smart money is leaning bullish but keeping dry powder for exactly this scenario.

Dan Sheehan

[email protected]

This newsletter is for informational purposes only and should not be considered investment advice. Please consult with your financial advisor regarding your specific situation.

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