Powell's Dovish Tone Sparks Rate Cut Hopes & Stock Rally

Good Morning Investors,

Stocks finished last week with a strong upside reversal after Jerome Powell opened the door to interest rate cuts as soon as September. On Friday, the S&P 500 rose 1.5%, the Nasdaq Composite gained 1.9%, and the Russell 2000 led with a 3.9% surge. For the week, the S&P 500 was up 0.3% while the Nasdaq slipped 0.6%.

Powell's Jackson Hole speech struck a more dovish tone, highlighting a “curious kind of balance” in the labor market, both supply and demand for workers have slowed, and warning that downside risks to employment can materialize quickly. On inflation, he reiterated that tariffs should produce a one-off price increase rather than a persistent impulse. Markets read this as the Fed being prepared to act if the data co-operates.

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US equity futures are slightly softer this morning, with the Dow ($DIA ( ▲ 0.31% )) down 0.2%, the S&P 500 ($SPY ( ▲ 0.42% )) lower by 0.2%, and the Nasdaq 100 ($QQQ ( ▲ 0.4% )) off 0.3%. European markets are easing after approaching record highs last week, while in Asia, Chinese and Hong Kong stocks climbed on strength in rare earth and property names, and Japanese equities gained on financial sector strength and a weaker yen. Oil prices are firmer on Russian supply disruption fears, gold is softer, and the dollar is steady near recent highs.

Powell’s message was dovish in tone but left the Fed optionality intact. My base case is a 25bp cut in September, followed by a pause to assess inflation data, then another move in December. I do not see this as the start of an aggressive rate-cutting cycle, more a tactical adjustment to protect a softening labor market that the Fed no longer believes will fuel inflation. It will become a cycle after the December cut, if the data allows for it.

Mortgage spreads remain elevated at around 360bps over the 10-year yield, well above the historical 160bps. A cooler housing market would aid the broader economy, and while rate cuts may not immediately drive mortgage rates lower, a dovish Fed stance over the next year should help. The yield curve steepened post-Powell, a move that can be as much about improving growth expectations as recession risk.

Rotation was the other big takeaway. Equal-weight, small, and mid-caps outperformed, with the Russell 2000 ETF up nearly 4% Friday. I increased exposure to these segments ahead of Powell's speech on Wednesday 13th, shifting from a tech-heavy stance to equal-weight S&P positioning. A weaker dollar could further support international equities into year-end.

Nvidia ($NVDA ( ▲ 1.09% )) sits at the macro and earnings intersection this week. It reports Wednesday and will be the defining event for AI sentiment. The stock has nearly doubled since April's low, but export license uncertainty around China could see guidance come in below consensus. Given recent profit-taking in tech, I expect sentiment selling to clear quickly unless Nvidia significantly disappoints. Longer term, tech remains the structural leader that can drive the S&P 500 toward 7,000 by mid-2026.

Crypto markets mirrored the broader risk-on tone from Powell’s speech. Ethereum ($ETH.X ( ▲ 4.94% )) hit a new record over the weekend, briefly topping $4,950 before pulling back 6% Monday. Bitcoin ($BTC.X ( ▲ 1.52% )) is lower around $111,500 after a volatile few days.

ETH’s leadership is being driven by ETF inflows, corporate treasury adoption, and nearly a third of supply locked in staking. With scaling solutions in place and rate cuts back on the table, capital costs are falling and institutional demand is becoming more entrenched.

Friday’s surge saw ETH ETFs take in $341 million in inflows, led by Fidelity’s FETH, while Bitcoin ETFs posted their sixth straight day of outflows. I remain a buyer of ETH and BTC dips.

08:00 – Building Permits (July)

08:30 – National Activity Index (July)

10:00 – New Home Sales (July)

10:30 – Dallas Fed Manufacturing Index (Aug)

Powell’s speech confirmed the Fed’s readiness to act without committing to an aggressive cutting cycle. I expect a hawkish 25bp cut in September, a pause, and then a second cut in December. This measured approach reflects the Fed’s dual mandate, protecting employment without reigniting inflation pressures.

The current environment favors tactical positioning over binary bets. Small and mid-cap exposure offers compelling risk-adjusted returns as rate-sensitive sectors benefit from policy normalization, while maintaining quality growth exposure remains prudent given structural technology trends. Nvidia’s earnings will be a litmus test for whether AI capex cycles can sustain valuations.

A successful Fed pivot could unlock significant pent-up demand across housing and other interest-sensitive sectors. Over the next 90 days, data will determine whether we’re in a temporary growth pause or entering a more persistent deceleration, making data dependency the defining investment theme through year-end.

Please feel free to reach out to me on LinkedIn or by email if you would like help navigating this market environment or have any planning-related questions.

Dan Sheehan

[email protected]

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