Jerome Powell's Jackson Hole Speech Could Make or Break the Stock Market Rally

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9 hours ago

Key Takeaways
All eyes are on Federal Reserve chair Jerome Powell, whose speech at the central bank's annual Jackson Hole Symposium could test the stock market rally that's lifted stocks to record highs.
Deutsche Bank analysts warned in a note on Tuesday that Powell's comments "could create uncertainty about September cut prospects."
A hawkish Powell could spell trouble for the market as a whole, but especially for rate-sensitive stocks like homebuilders and small caps, which have rallied in anticipation of cuts.
Federal Reserve chair Jerome Powell is scheduled to speak at the central bank's annual Jackson Hole Symposium on Friday, an event that could be a major test of the stock market's post-"Liberation Day" rally.
Investors are likely to read into Powell's comments for signs of what Fed officials will do at their next policy meeting in September. The Fed cut rates three times last year—by 50 basis points in September, 25 bps in November, and another 25 bps in December—but has stood pat this year as policymakers have waited to see how President Trump's tariffs and immigration crackdown rippled through the economy.
Market participants are confident the Fed is poised to resume rate cuts next month after big downward revisions to jobs growth in July's employment report and mostly better-than-feared consumer price data. Federal funds futures trading data on Wednesday put the odds of a rate cut at about 83%, down from 100% a week ago but well above last month's 60%, according to CME Group's FedWatch Tool.
Nonetheless, Wall Street's jitters about Friday's speech have been apparent this week. The S&P 500 and Nasdaq Composite fell for a second straight day on Wednesday, dragged by slumping tech stocks.
What Is Powell Expected to Say?
Market participants will be listening for evidence that Powell's thinking about the labor market and inflation outlook has changed in light of recent data.
When the Fed chair last spoke in July, he "struck a notably hawkish tone, arguing that the labor market was 'solid' and that inflation was still too high, even excluding tariff effects," according to Deutsche Bank economists.
Deutsche Bank expects Powell to strike a different tone this week, and nod at the possibility that July's disappointing jobs report may foretell more weakness ahead. But they also anticipate he'll "reiterate reasons why he and his colleagues are more focused on measures of labor market slack," like the unemployment rate, "than headline payrolls figures."
The White House's immigration crackdown has caused labor supply growth to slow dramatically this year. As a result, fewer jobs need to be created to maintain a stable unemployment rate and satisfy the "maximum employment" side of the Fed's dual mandate.
Powell pointed to this dynamic when he called the labor market "in balance" last month. Deutsche Bank expects him to strike a more cautious tone this week, "while still prioritizing measures of slack," like the unemployment rate. That emphasis on labor supply factors, they said, "could create uncertainty about September cut prospects, at least relative to current elevated pricing."
How Would Markets Reach To a Hawkish Powell?
A hawkish Powell—one who signals concern about the impact of tariffs on inflation and skepticism about recent signs of labor market weakness—would be bad news for a market that expects interest rates to go down next month.
Analysts at Evercore ISI warned in a note on Sunday that stocks could pull back by 7% to 15% into October if today's optimistic, pricey market interprets Powell's "balanced view" as hawkish.
The stocks most at risk of a Powell pullback are those that have benefited the most from recent rate-cut optimism. Shares of homebuilders D.R. Horton (DHI) and Lennar (LEN) rose about 25% and 18%, respectively, in the last month as investors front-ran rate cuts. Home-improvement retailers Lowe's (LOW) and Home Depot (HD) have seen similar boosts from confidence that rate cuts would reinvigorate America's sluggish housing market.
How Stocks Might React If Powell Turns Dovish
A dovish pivot by Powell could spur a rally in small-cap stocks and shift leadership among large caps, according to Bank of America.
Bank of America equity analyst Jill Carey Hall observed in a note on Wednesday that small caps usually outperform in rate-cutting cycles that coincide with recessions, but that performance is more mixed outside of economic contractions. However, "a cut in the absence of weaker macro data could be more positive than historically given the increased sensitivity of small caps to interest rates/elevated refinancing risk," wrote Hall.
The sustainability of a rate cut rally, Hall said, "will likely depend on the profits backdrop," which itself will rest on the macroeconomic effects of tariffs, tax cuts, and other policy shifts out of Washington.
In a separate note last week, BofA's Savita Subramanian noted the firm's "US Regime Indicator," a business cycle measure, strengthened in July, and could enter the "Recovery" phase if it strengthens again in August. That would bode well for the smaller stocks in the large-cap S&P 500, which tend to outperform in that phase.
"History would suggest there is more to go in cap-weighted dominance," wrote Subramanian of the trend over the last 8 years of the largest stocks in the S&P 500 outperforming the broader index. "But if the Fed's next move is a rate cut, and if the Regime indicator is shifting to a Recovery, we think the run may be closer to done."
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