Stock Markets Are Loving Powell’s Rate Pivot. These Reports Could Undo It.

Fed Chair Powell’s Jackson Hole speech has stock markets soaring on rate cut bets. But we aren’t there yet. (Andrew Harnik/Getty Images)

U.S. stocks are powering higher Friday, putting the S&P 500 back on record watch, following what markets are interpreting as a dovish pivot on interest rates from Federal Reserve Chairman Jerome Powell.

Investors appear to be pinning bets on that change from a key segment of Powell’s speech at the central bank’s annual symposium in Jackson Hole, Wyo. The Fed Chair said that the Fed’s current rate framework is “restrictive” and that “the shifting balance of risks may warrant adjusting our policy stance.”

The S&P 500 surged more nearly 100 points, or 1.5%, in the immediate wake of Powell’s speech, with the tech-focused Nasdaq rising nearly 400 points, or 1.8%, to test its all-time peak. The Dow also hit a record high.

“Powell did what he had to do: He opened the door for a September cut, but signaled to the market that the Fed will be cautious after that,” said Heather Long, chief economist at Navy Federal Credit Union.

But are markets pushing too hard on odds of both a September rate cut and follow-on reductions over the final months of the year?

Powell alluded to labor market weakness, but he also seems cognizant of the impact of tariffs on consumer price pressures now that President Donald Trump’s trade policy appears more established.

“In the near term, risks to inflation are tilted to the upside, and risks to employment to the downside—a challenging situation,” Powell said. “When our goals are in tension like this, our framework calls for us to balance both sides of our dual mandate.”

Interestingly, data affecting each aspect of the Fed’s mandate, which calls for full employment and stable prices, will arrive before the central bank’s Sept. 17 policy meeting in Washington.

And perhaps even more interestingly, both will be published by the new leadership at the Bureau of Labor Statistics.

The BLS will release its August jobs report on Friday Sept. 5, with revisions to prior estimates due on Sept. 9.

Last year, the BLS’s review ultimately resulted in a 598,000 markdown in jobs created in the 12 months ending in March 2024. The original reduction estimate, however, was 818,000.

This year’s release, hot on the heels of president Trump’s move to fire the head of the BLS and replace her with administration loyalist E.J. Antoni, will draw market attention.

Just two days later, on Sept. 11, the BLS will publish its August inflation report, which is expected to reflect at least some of Trump’s new tariff policies implemented earlier this month.

By some estimates, the current effective tariff rate sits between 18% and 19%, compared with just 3% in August 2024.

That could mean markets are primed for potential Fed disappointment. If the August inflation reading shows accelerating core prices, and jobs report revisions suggest a stronger-than-expected labor market, the “balance of risks” described by Powell could change significantly.

Stocks are also historically expensive. The S&P 500 trades at 22.5 times the earnings it is expected to generate over the next 12 months, according to LSEG data.

“The egregious levels of multiples and the valuations are going to limit what future gains we get in the stock market,” cautioned David Rosenberg, president of Rosenberg Research, during a Friday interview with CNBC. “I’m not surprised at the knee-jerk reaction, but it’s an outsized reaction.”

“The stock market sees no recession risk and the prospect of more liquidity (through lower Fed rates),” he added. “I think this is an asset bubble…but that doesn’t mean the enthusiasm can’t continue.”

While that seems true, doves and bubbles can be a dangerous combination.

Write to Martin Baccardax at martin.baccardax@barrons.com