The S&P 500 and Nasdaq are in rally mode, climbing off recent lows as investors cheer better-than-expected earnings. But beneath the surface, there’s growing tension: Wall Street is laser-focused on what the Federal Reserve will say next.
According to Reuters, traders and fund managers are now betting that the Fed could pause or pivot from its current policy stance if inflation data continues to cool and labour markets soften but a misstep could rattle the recovery.
Why the Fed Matters More Than Ever
- Fed Funds Rate is at 5.50%, and most investors believe it’s near the peak.
- Markets want confirmation that rate hikes are over, and rate cuts may begin in H2 2025.
- A hawkish surprise (more tightening) could spook stocks and risk assets.
- A dovish signal (pause or pivot) could fuel another leg of the bull run.
What’s Driving the Rally?
- Tech Earnings Beat Expectations:
- Apple, Meta, and Alphabet all delivered strong Q1 results.
- Bond Yields Stabilising:
- 10-year Treasury yields have cooled from their highs, boosting equities.
- Retail Investors Re-entering:
- Momentum buyers are back in the market after sitting on the sidelines for most of Q1.
- Global Sentiment Improving:
- Easing tensions in trade and inflation outlooks are lifting risk appetite.
The Market Isn’t the Economy
Wall Street reacts to expectations, not headlines. That’s why stocks can rally while GDP slows if investors think better times are ahead.
This week’s performance is being driven by hopes, not hard data. Smart investors stay cautious.
What to Watch Next
- Fed Chair Powell’s speech after the May FOMC meeting
- April jobs report and wage inflation data
- Guidance from major banks on credit conditions and consumer health
Financial Juggernut Take
The rally has legs but it’s standing on a Fed wire.
If Powell blinks dovish, markets will surge. If not, expect a sharp correction.
