Federal Reserve Chair Jerome Powell’s remarks regarding the future of interest rates, which economists dubbed as a “measured reset” of the Fed’s rate cut plans, failed to incite the anticipated market volatility on Tuesday. Although many expected a more significant reaction, investors remained relatively composed, and both the S&P 500 and the Dow Jones Industrial Average demonstrated resilience.
One explanation for the market’s subdued reaction lies in the prior expressions of caution from other senior Fed officials regarding rate cuts without clear evidence of slowing inflation. Notably, Fed Vice Chairman Philip Jefferson and San Francisco Fed President Mary Daly had suggested that rates might stay elevated until inflation showed signs of deceleration. Even Chicago Fed President Austan Goolsbee, typically associated with a more dovish stance, expressed surprise at the persistent inflation in housing services.
The market’s familiarity with this cautious sentiment from various Fed officials likely mitigated the impact of Powell’s comments, echoing the Fed’s strategy in late 2023 to signal the end of interest rate hikes.
Moreover, the sustained robust growth of the U.S. economy in the first quarter, as indicated by estimates from the Atlanta Fed’s GDPNow tracker, bolstered investor confidence. This optimistic economic outlook is favorable for corporate earnings, which have emerged as the primary driver of stock market gains in 2024, overshadowing concerns about monetary policy.
While hopes for aggressive Fed rate cuts had fueled an “everything rally” late last year, the market has since shifted its focus to earnings growth. Consequently, any pullbacks or declines in stock prices are now perceived as routine consolidation rather than a reaction to Fed policy.
Looking ahead, the biggest risk to stocks may not be the Fed, but rather the potential for companies to fall short of earnings growth expectations. With corporate profit margins facing downward pressure for many firms, particularly outside of standout performers like Nvidia Corp, sustaining earnings growth becomes crucial for maintaining the current market rally.
Additionally, other external threats, such as geopolitical tensions highlighted by the conflict between Israel and Iran, also pose risks to market stability.
Despite the mixed performance of major indexes on Tuesday, with the S&P 500 and Nasdaq Composite closing lower while the Dow Jones Industrial Average ended higher, the overall sentiment suggests that investors are cautiously navigating potential risks while remaining focused on economic fundamentals and corporate earnings prospects.