By Daniela Sabin Hathorn, senior market analyst at Capital.com
As global investors prepare for the Federal Reserve’s annual Jackson Hole Economic Symposium, market sentiment appears to be shifting in response to evolving macroeconomic data, robust corporate earnings, and speculation over the depth and timing of interest rate cuts.
Equity markets supported by strong earnings and softer data
The equity landscape remains constructive, with indices such as the S&P 500 and Nasdaq (US 100) reaching new highs, while cyclical indices like the Russell 2000 have begun to outperform. This broad-based strength reflects a market narrative focused on a resilient U.S. economy, despite softening macro data and geopolitical noise.
Recent earnings have largely surprised to the upside, reinforcing investor confidence in corporate fundamentals. Meanwhile, economic data—particularly from the labour market—has shown signs of cooling. This combination has meant markets have remained resilient as on monetary policy easing increase, with investors now pricing in a high probability of a 25 basis point rate cut in September.
Rates expectations: A moving target
Market expectations for Federal Reserve action have been volatile. Earlier in the month, weak labour market data had pushed expectations briefly toward a 50 basis point cut, but hotter-than-expected PPI data quickly reversed this outlook. Now, the base case has normalized to a 25 bps cut, with a smaller portion of the market hedging against no cut at all.
This constant repricing underscores the Fed’s data dependency. Inflation remains sticky in places—potentially exacerbated by tariff pass-through effects—making the upcoming Jackson Hole Symposium a critical moment for policy guidance.
As ever, the key issue remains the Federal Reserve’s reaction function. Markets are now looking for clarity on two fronts:
- Will the Fed prioritize labour market support over residual inflation concerns?
- How much weight will the central bank place on recent data shifts, particularly weaker employment figures?
Fed Chair Jerome Powell’s speech at Jackson Hole will be instrumental in answering these questions. If Powell maintains a “wait and see” tone, as he has in previous meetings, markets may interpret that as a sign the Fed remains behind the curve. However, should he signal a more dovish shift in response to labour market concerns, this could further fuel the current rally in equities and sustain downward pressure on the U.S. dollar.
Rotation signals a healthy bull market
A notable rotation has emerged in recent sessions. While the tech-heavy Nasdaq has shown some signs of exhaustion, indices like the Dow and Russell 2000 have gained traction, benefiting from their exposure to cyclical and domestic sectors. This rotation is often seen as a hallmark of a healthy bull market, where leadership shifts across sectors rather than collapsing altogether.
The rotation also reflects the repricing of the U.S. rates curve. As expectations of imminent and aggressive rate cuts fade, more economically sensitive areas of the market have come into favour, indicating investor confidence in the underlying strength of the economy.
Dollar outlook and global implications
The dollar has weakened in recent weeks amid narrowing rate differentials and declining U.S. economic exceptionalism. While sticky inflation prints have temporarily steadied the greenback, sentiment is now aligned with the view that rate cuts are imminent and likely to continue through the end of the year.
This undermines the dollar’s strength relative to other currencies and also diminishes its appeal as a safe haven in the current macro environment, particularly given risk appetite has remained resilient in equity markets.
