Unraveling Powell’s Reset: Why Investors Stayed Calm Amid Fed Rate-Cut Expectations

According to strategists and fund managers, markets are shifting their dependence away from Fed rate cuts and focusing more on corporate earnings growth.

Federal Reserve Chair Jerome Powell’s recent comments about interest rates didn’t cause as much market turbulence as expected. The S&P 500 finished above its session lows, and the Dow Jones Industrial Average ended a six-session losing streak.

The slight rise in the yield on the 2-year Treasury note was noted but didn’t cause significant market disruption.

Market observers attribute the market’s stability to two main factors:

  • Firstly, other senior Fed officials have previously hinted at their reluctance to cut rates without stronger evidence of slowing inflation, reducing the surprise factor in Powell’s remarks.
  • Secondly, recent data indicating robust economic growth in the U.S. supports corporate earnings, which have now become the primary driver of stock performance in 2024.

Last year’s anticipation of aggressive Fed rate cuts triggered a broad rally, but now the focus has shifted. While the market has cooled from its speculative highs, it remains significantly above previous lows.

The current market decline is seen as routine consolidation rather than a significant downturn. However, the primary risk to stocks isn’t seen as Fed policy but rather the ability of companies to meet earnings expectations.

Investors can no longer rely solely on Fed rate cuts to support stocks; instead, companies must deliver on earnings growth to sustain the market rally.

Analysts project significant earnings growth for the S&P 500 in the fourth quarter, but meeting these expectations might be challenging for many companies, especially considering the trend of declining profit margins outside of a few notable exceptions.

Additional threats to the market include geopolitical tensions, such as those between Israel and Iran.

Despite some recent declines, stocks have generally remained resilient, with the S&P 500 and Nasdaq Composite falling for three straight days but still significantly above their recent lows. The Dow Jones Industrial Average saw a slight gain, showing mixed market performance.

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