All three main U.S. equity indexes gapped up at the opening bell and bounced even higher after Federal Reserve Chair Jerome Powell suggested in his keynote speech at the Jackson Hole Economic Symposium that, all things considered, the Fed could cut interest rates as soon as September.
"In the near term," Powell said at Jackson Hole, "risks to inflation are tilted to the upside, and risks to employment to the downside." In his prepared remarks, Powell cited the still-emerging impacts of shorter-run factors such as tariffs and immigration policy as well as longer-term factors such as fiscal and regulatory policy.
"The effects of tariffs on consumer prices are now clearly visible," the Fed chair said of inflation. At the same time, however, "A reasonable base case is that the effects will be relatively short lived – a one-time shift in the price level." Powell also acknowledged "GDP growth has slowed notably" this year.
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Noting the Fed's framework requires it to balance both sides of its dual mandate, Powell conceded that "with policy in restrictive territory, the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance."
The Fed chair concluded by emphasizing members of the Federal Open Market Committee will make policy decisions "based solely on their assessment of the data and its implications for the economic outlook and the balance of risks" and "will never deviate from that approach."
The yield on the 2-year U.S. Treasury note – a good proxy for market expectations for Fed moves – ticked down to 3.694% from 3.792% as of Thursday.
According to the CME Group's FedWatch tool, the probability Powell & Co. will cut the target range for the federal funds rate by 25 basis points at the next Fed meeting is 83.1%, up from 75.0% as of August 21.
"Labor-market weakness appears to have outweighed inflation risk for the Fed," observes Morgan Stanley Wealth Management Chief Economic Strategist Ellen Zentner, "and the markets' initial response speaks for itself."
The Fed reaffirmed its 2% inflation target as part of its monetary policy framework review. But, as Zentner concludes, there are other longer-term questions in play now: "The debate about how far and fast the Fed will cut rates is just beginning."
Though Powell did not address the issue today, central bank independence is another lingering question after President Donald Trump said he would fire Fed Governor Lisa Cook over allegations of mortgage fraud if she refuses to resign.
The U.S. Dollar Index (DXY) declined by 0.9% to 97.74 vs 98.62 Thursday, and the 10-year U.S. Treasury yield, also a broad indicator of market sentiment, fell to 4.258% from 4.332% Thursday.
At the closing bell, the blue-chip Dow Jones Industrial Average was up 846 points and 1.9% to 45,631, shattering its previous all-time record closing high of 45,014.04 set on December 4, 2024.
The broad-based S&P 500 had added 1.5% to end a five-session losing streak and close the week at 6,466 – a new all-time high on a weekly closing basis.
And the Nasdaq Composite was higher by 1.9% to 21,496, the tech-heavy index riding refreshed risk-on appetite to end within 1% of its own new closing high.
Who led the Dow stocks? CAT? CAT?! CAT!
Caterpillar (CAT) led the 30 Dow Jones stocks for a while today, and so did Sherwin-Williams (SHW).
SHW has all appearances of a Peter Lynch stock for those who like to focus on how to invest in what you know. But CAT – one of the best stocks to buy for dividend growth – came out on top Friday.
CAT continues to enjoy renewed support on Wall Street, with Evercore ISI analyst David Raso upgrading the industrial stock from Hold to Buy this week and raising his 12-month target price from $365 to $476. Raso rated Caterpillar a Sell at the start of 2025.
As Al Root of Barron's reports, FactSet data shows that 54% of analysts now rate CAT stock Buy, up from 33% a year ago. And the average 12-month target price is $454 vs $353.
Earnings are still the thing … Nvidia's most of all
Nvidia (NVDA) did not make a new all-time high Friday. But the leader of the AI revolution will take its place on the earnings calendar after the closing bell Wednesday, August 27. And it's fair to say the whole world will be watching – or at least that part of it invested in the stock market.
NVDA stock is up more than 30% in 2025 vs a gain of about 10% for the S&P 500, supported by AI and data center spending by "big four" hyperscalers Alphabet (GOOGL), Amazon.com (AMZN), Meta Platforms (META) and Microsoft (MSFT) as well as stable inflation, economic growth and "expectations of declining interest rates," according to Treasury Partners Chief Investment Officer Richard Saperstein.
Wedbush analyst Matt Bryson reiterated his Outperform (or Buy) rating and raised his 12-month target price from $175 to $210 heading into Nvidia's earnings announcement. "We continue to believe growth in announced hyperscale spend is largely going to build out AI capabilities and in particular end up flowing to NVDA," the analyst says.
Be sure to join us next week for our live Nvidia earnings coverage.
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