Wall Street holds its breath before Jackson Hole

Wall Street saw a quiet start to a key Federal Reserve week, with geopolitics coming into play as President Donald Trump said he hopes to set a trilateral meeting with Russia and Ukraine as the White House welcomed Volodymyr Zelenskiy to discuss a potential peace deal. 

Following a series of all-time highs for the S&P 500, the gauge wavered. The Trump administration was said to be in discussions to take a stake of about 10% in Intel Corp. Traders will get a close look at how American consumers were faring in the early days of Trump’s tariff regime when retail giants like Walmart Inc. and Target Corp. report earnings this week.

The yield on 10-year Treasuries rose two basis points to 4.34%. The Bloomberg Dollar Spot Index added 0.2%. The UK’s 30-year inflation-linked yields hit the highest since 1998. Oil edged up. Gold fluctuated.

A big week is coming up for the central bank as the Kansas City Fed’s annual Economic Policy Symposium kicks off Thursday in Jackson Hole, Wyoming. The prestigious event in the Grand Teton mountains has been used by Fed chairs as a venue for making crucial policy announcements.

Jerome Powell is expected on Friday to unveil the Fed’s new policy framework — the strategy it’ll use to achieve its inflation and employment goals. He may also drop some hints about the Fed’s thinking ahead of its September policy meeting.

“For now, the market appears to be betting that signs of labor-market weakness will outweigh inflation risk in the Fed’s rate-cutting debate,” said Chris Larkin at E*Trade from Morgan Stanley.

Powell’s Jackson Hole speech will be the focal point this week, with the nature of the debate shifting from whether the Fed will cut rates to how much and how quickly, according to Jason Pride and Michael Reynolds at Glenmede.

“The stars are aligning for a September rate cut; inflation remains relatively restrained and the labor market is beginning to show early signs of weakness,” they said.

Bond markets have been tempted to think it’s already a lock. Two-year Treasury yields have plunged this month as traders swung toward pricing in a quarter-point reduction in September. 

Those bets took off after the unexpectedly bad July employment report, which also revised payrolls for the prior months downward. And they’ve only been dialed back slightly in the light of last week’s inflation surprise.

“If the Fed is going to cut next month, expect hints out of this week’s Jackson Hole Symposium,” said Scott Wren at Wells Fargo Investment Institute.

Interest-rate swaps show a roughly 80% chance that the Fed will lower rates next month by 25 basis points, with two cuts fully priced in by the end of the year. 

“We believe that it would be irresponsible for the Fed to cut rates in aggressive manner going forward. That would only make the bubble a bigger one than it already is right now,” said Matt Maley at Miller Tabak. “That would create much more serious problems when that bubble inevitably bursts.” 

“It’s likely the FOMC will cut rates in September to manage the risk of a potential fallout in the labor market,” said Anna Wong at Bloomberg Economics. “But given uncertainty on the upcoming August jobs report, Powell won’t be able to say as much in Jackson Hole.”

To Krishna Guha at Evercore, Powell has considerable latitude heading into his Jackson Hole speech Friday in terms of how specific or not he wants to be in terms of the message for September.

“We suspect he will continue to be careful and will not commit his hand in advance for the next meeting,” Guha said. “But we think the message will be consistent with what we see as a pretty solid central case of a ‘cautious cut’ with 25 basis points in September.”

At Ned Davis Research, Joe Kalish says investors looking for guidance for the September meeting may be disappointed.

“Powell will want to preserve his optionality,” he said.

Oscar Munoz at TD Securities expects Powell will begin signaling the Fed bias towards easing in his Jackson Hole speech. His firm has revised its Fed call to rate cuts beginning in September after a more-modest-than-expected tariff passthrough in the July consumer price index.

With recent downward jobs number revisions and stable inflation, Richard Saperstein at Treasury Partners expects the Fed to use Jackson Hole as an opportunity to prepare the markets and signal a potentially accommodating stance through year-end. 

“We expect a 25 basis-point rate cut in September as a nod to the surprise weakness in hiring in recent months,” he said. “The powerful combination of stable inflation, ongoing economic growth and expectations of declining interest rates justifies current stock valuations.”

Although multiples are elevated, stocks should continue to benefit from earnings growth into the end of the year, Saperstein noted.

“The economy continues to show resilience in the face of three years of elevated interest rates and more recently, the addition of tariff shocks,” he said.

US small-cap stocks have the scope to rally further as traders price in a rate reduction from the Fed next month, according to Oppenheimer Asset Management strategists led by John Stoltzfus.

They say near-term equity performance suggests “the market is recognizing fundamentals remain pretty much intact.”

S&P 500 companies trounced expectations this earnings season after they found ways to blunt the impact of tariffs and benefitted from a weaker dollar, according to strategists at Goldman Sachs Group Inc.

“The quarter has been marked by one of the greatest frequency of earnings beats on record,” David Kostin, chief US equity strategist at Goldman Sachs, wrote in a note.

Analysts are ratcheting up earnings estimates for the current quarter at the swiftest pace in nearly four years. A Citigroup Inc. index that tracks the relative number of US earnings-per-share estimate upgrades versus downgrades is at its highest since December 2021.

“Strong beat rates, big upside earnings surprises, and increases in estimates during the past four weeks were consistent themes that gave investors very little to complain about,” said Jeffrey Buchbinder at LPL Financial. “This is a big change from first quarter earnings season in April and May, which was more muddied by tariff uncertainty.”

To Mark Hackett at Nationwide, the combination of strengthening fundamentals and relentless technical momentum has pushed markets higher, even as retail investors defy traditional playbooks.

“As a result, institutions are being forced to move against their own models, raising the prospect that the usual period of market weakness may never materialize,” he said.

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