Federal Reserve Chair Jerome Powell is expected to acknowledge the stronger-than-expected economy and robust labor market, note that inflation is nearing the 2.0% target, and hint at a potential rate cut in September if upcoming CPI reports show further progress towards the inflation goal during his FOMC speech on Wednesday.
According to Yardeni Research, this is what the market expects the central bank boss “to say directly or to strongly suggest.”
“If that’s right, then the S&P 500 might continue to churn below its July 16 record high as investors continue to rotate out of the Magnificent-7 into everything else,” Yardeni analysts said in a note.
“Then again, he might push back on the widespread belief that there might be more than one rate cut over the rest of this year.”
Yardeni points out that employment indicators released Tuesday suggest the labor market is stable, though some economists view it as weakening.
The July Consumer Confidence Index showed a decline in respondents who believe "jobs are plentiful" to 34.1% from February's 42.8%, while those saying "jobs are hard to get" increased to 16.0%.
This indicates that 49.9% of respondents think jobs are available, slightly above the historical norm of 48.1%.
The "jobs plentiful" series aligns closely with the JOLTS data on job openings and quits, both updated through June, Yardeni said.
If Fed Chair Powell's upcoming press conference is as dovish as his last, the rotation out of the "Magnificent-7" stocks, which began on July 11, “might continue for a while longer as investors bet on stocks of companies that will benefit the most from lower interest rates,” the research firm added.
Yardeni's current scenario for the S&P 500 predicts it will remain below its July 16 record high until the November elections, followed by a year-end rally.
"Along the way, the recent rotation should continue as the bull market broadens,” it concluded.