Jerome Powell's Jackson Hole speech could rally stocks around a soft landing - but messaging is key

By Joy Wiltermuth

Investors want to know if the 'pain to households and businesses' from Powell's 2022 speech still lurks on the horizon

Stocks were taking a breather on Thursday, a day ahead of Federal Reserve Chair Jerome Powell's highly anticipated speech at the annual Jackson Hole Economic Symposium in Wyoming.

While a repeat of Powell's brief, blunt remarks two years ago that sparked upheaval in financial markets isn't expected, investors remain on edge about what degree of "pain to households and businesses" from his 2022 speech might still might lurk on the horizon.

"It's a bit of a myth that the market is solely trading off expectations for Fed rate cuts," said Kevin Gordon, a senior investment strategist at Charles Schwab, in an interview on Thursday.

Instead, Gordon views the turnaround in stocks since an early August rout as rooted in confidence about easing inflation and a soft-landing scenario for the U.S. economy. He also sees growing confidence among investors in an earnings recovery for areas outside of the highflying technology sector.

The equal-weight version of the S&P 500 index XX:SP500EW, for example, has quickly reclaimed its record territory set in July, even though the standard S&P 500 SPX still had 0.8% to go as of Wednesday's close.

"All of this tells me we already are in a soft landing," Gordon said. From here, stocks are likely to hinge on whether the economy looks poised for a broader-based slowdown, an expansion or a recession, he added.

A chief criticism of the S&P 500's rally to record highs in 2024 has been its narrow concentration in a few megacap tech names. A worry has been that the gains of a limited number of stocks makes the rally look unsustainable, leaving it vulnerable to big setbacks if the outlook for tech earnings suddenly sours or if optimism around artificial intelligence evaporates.

That's why the quick recovery of the equal-weighted S&P 500 index stands out. The index covers the same companies as the traditional S&P 500, but plays down the role of trillion-dollar tech giants by putting each company in the index on an equal footing, regardless of a company's market value.

"The narrative of the market has turned more positive," said Larry Adam, chief investment officer at Raymond James, about recent evidence of a broadening of the earnings recovery.

Related: Powell's Jackson Hole speeches tend to lift the stock market - but when they don't, the drop is a doozy

Clearly, a lot still hinges on chip maker Nvidia Corp.'s (NVDA) quarterly results due next week, Adam noted. Yet he also expects more companies to benefit from a slowing albeit still growing U.S. economy. "It looks like a soft landing, on the back of inflation that continues to cool," he said.

See: Wall Street investors look beyond tech for next phase of stock market's rally

Gordon at Schwab said the overall resilience of consumer spending will remain a major focus for investors, but also whether the cooling labor market keeps adding jobs every month.

Tiffany Wilding, a Pimco economist, said in a Thursday client note that it would likely come down to whether companies "overhired or overinvested" in the wake of the pandemic and its consumption boom. She also sees a path back to a "normal" economy if the overtightening of monetary policy can be avoided.

To that end, Gordon wants to hear what Powell might say on Friday about how big of a role the Fed's restrictive interest rates had on tackling inflation, versus the influence of the normalization of supply-chain stress. "That's important, because it could influence the cutting cycle," he said.

Odds favor 100 basis points of rate cuts through December, a level that would lower the fed-funds rate to a 4.25% to 4.5% range, according to the CME FedWatch Tool as of Thursday.

Should the Fed cut rates aggressively at its upcoming meetings, that could indicate stress building in the economy, which could once again rattle the stock market as it did in early August after the weak July jobs report.

"Messaging is key," Gordon said.

The Dow Jones Industrial Average DJIA was lower Thursday, putting it on pace for a modestly weekly loss, while the S&P 500 SPX was up 0.2% for the week and the Nasdaq Composite COMP was roughly unchanged on the week, according to FactSet.

-Joy Wiltermuth

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08-22-24 1525ET

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