Stocks Climb as Powell’s Comments Strengthen Outlook for Fed Policy

Wall Street saw a turbulent trading session Tuesday before stocks rebounded sharply, as Federal Reserve Chair Jerome Powell fueled expectations that policymakers are preparing to cut interest rates in October amid mounting signs of a cooling labor market.

‍

After falling as much as 1.5%, the S&P 500 recovered its losses and moved higher. Short-term Treasuries led gains, while the dollar swap spread curve widened significantly following Powell’s comments that the Fed may soon end its balance sheet reduction program. The dollar slipped, and gold hovered near record highs.

‍

JPMorgan Chase & Co.’s Michael Feroli called Powell’s remarks “strong confirmation” that a rate cut is likely at the next Fed meeting. Evercore’s Krishna Guha echoed that sentiment, noting that with the Fed’s outlook for growth and inflation largely intact, policymakers appear ready to ease monetary policy this month.

‍

“Powell’s mention of winding down quantitative tightening and his acknowledgment of liquidity concerns point toward a more dovish stance,” said David Russell of TradeStation.

‍

The central bank has been gradually shrinking its balance sheet since 2022 through quantitative tightening reversing the massive asset purchases made during the pandemic to support the economy. Earlier this year, the Fed slowed the pace by letting fewer bonds roll off its holdings each month.

‍

Interestingly, the rebound in risk assets had already started before Powell’s remarks. Momentum picked up after U.S. Trade Representative Jamieson Greer told CNBC that President Donald Trump still planned to meet Chinese President Xi Jinping, reviving optimism that trade negotiations might resume.

‍

Earlier in the day, markets had been rattled after China imposed sanctions on U.S. units of a South Korean shipping firm, raising the threat of more trade retaliation. At the same time, investors monitored the unofficial start of earnings season, with a key banking index climbing following solid quarterly results.

‍

“It remains uncertain whether the U.S. and China will reach some form of agreement or extend the tariff truce,” said Fawad Razaqzada of City Index and Forex.com. “While a complete breakdown into a trade war seems less likely, risks are clearly rising.”

‍

Ulrike Hoffmann-Burchardi of UBS Global Wealth Management said global tech and semiconductor stocks could experience heightened two-way volatility as trade talks evolve. Still, she remains “cautiously optimistic” that both sides will pursue a negotiated settlement given the economic stakes involved.

‍

Monday’s brief pause in selling gave way to another highly volatile session Tuesday, as lofty stock valuations combined with worries about the U.S. government shutdown and trade tensions fueled uncertainty.

‍

With the S&P 500 now entering its fourth year of a bull market, many analysts believe a pullback is overdue. The index has gone 97 sessions without a 5% correction far longer than the historical average of 59 days, according to Bloomberg data through October 13.

‍

Meanwhile, investor sentiment toward artificial intelligence stocks is showing cracks. A Bank of America survey revealed that a record number of global fund managers now believe AI stocks are in bubble territory after their meteoric rally this year. Roughly 54% of respondents in October said tech valuations look excessive, reversing last month’s more optimistic outlook.

‍

Despite valuation concerns, fund managers’ overall equity exposure remains upbeat. The same survey showed allocations to U.S. stocks rose to their highest level in eight months, before tariff worries resurfaced. Concerns about a recession also fell to their lowest since early 2022.

‍

Citigroup Chief Financial Officer Mark Mason acknowledged some market “frothiness” during the bank’s third-quarter earnings call when asked about AI stocks. “I’m confident in our business and client coverage,” he said, “but it’s hard to ignore that some equity sectors appear overvalued. Time will tell how that plays out.”

‍

As earnings season unfolds, analysts see opportunities for investors to buy on dips. Craig Johnson of Piper Sandler suggested that a multi-week consolidation phase may be underway as the market enters the fourth year of its bull run.

‍

Bret Kenwell of eToro noted that markets often outperform consensus forecasts during earnings season. If that trend continues, it could provide much-needed stability amid renewed volatility. “Back in April, strong earnings helped calm markets after a volatile stretch,” he said. “Financials offered reassurance about consumer strength, and management confidence grew over the summer. Investors are now hoping for another encouraging update.”

‍

Beyond banks, attention will focus on technology particularly mega-cap and AI-driven names. “Investors will want to see if big tech companies are still spending heavily on AI infrastructure,” Kenwell added. “Based on recent headlines, that investment cycle remains robust. Still, with talk of an AI bubble spreading, investors want clarity that these massive AI investments will ultimately deliver returns.”

‍

In short, the day’s swings reflected the market’s tug-of-war between optimism over potential Fed easing and anxiety surrounding trade disputes, lofty valuations, and the durability of the AI-driven rally. As the next Fed meeting and earnings season progress, investors will be watching closely to see which narrative ultimately prevails.

‍