Federal Reserve Chair Jerome Powell just wrapped up his speech at the central bank’s annual economic conference in Jackson Hole, Wyoming. His tone? Definitively dovish. It’s no surprise that the market is flying in response, especially the stocks that really need rate cuts to stoke profits. While Powell was sure to highlight the upside risks to inflation, he also indicated he believes it’s most likely that the Trump administration’s elevated tariffs will be a one-time hit to prices rather than the start of an inflationary spiral — though he was sure to note that a “one-time” hit doesn’t mean you get it “all at once” as the higher duty rates trickle through supply chains and distribution networks. Another key part of Powell’s message Friday is that the employment picture — the other part of the Fed’s dual mandate along with stable prices — is getting more precarious than it was a few months ago. The July jobs report and revisions to prior months showed a material slowing in job creation, something Powell mentioned Friday. “Overall, while the labor market appears to be in balance, it is a curious kind of balance that results from a marked slowing in both the supply of and demand for workers,” Powell said, before issuing this notable comment: “This unusual situation suggests that downside risks to employment are rising. And if those risks materialize, they can do so quickly in the form of sharply higher layoffs and rising unemployment.” Add these two things up, and you get a market with increased confidence that the Fed will likely cut rates at least twice times this year, with an increased likelihood that we see a third. The Fed’s first chance to do so is in late September. According to the CME FedWatch Tool , the odds of a September cut jumped to 91%, up from 75% yesterday, while the odds of a third cut before year end now stand at about 40%, up from the 25% odds being priced in Thursday ahead of Powell’s speech. The odds of only two cuts has held relatively steady in the mid-to-upper-40% range. The key statement backing this change in odds is more than likely Powell’s comment: “With policy in restrictive territory, the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance.” Indeed, even though Powell noted tension on both sides of the Fed’s mandate, when we read between the lines of his commentary on tariff-driven inflation pressures and labor market conditions, it seems clear the greater concern is the jobs market. On Thursday, we wrote that while lower rates are usually more supportive of high-flying tech stocks because they give investors clearance to pay more for each dollar of future earnings, a dovish stance would be especially positive for the so-called cyclical stocks that benefit from increased economic activity, which cheaper borrowing costs tend to spur. In the end, Powell managed to thread the needle perfectly and, as a result, all three major averages are rallying at least 1.5%. When we look underneath the hood of the S & P 500, the leading sector is consumer discretionary — and that makes sense because lower rates means more money discretionary money in consumers’ pockets. The sectors on its heels all benefit greatly from lower rates as well: real estate, industrials, and materials. Shares of homebuilder Lennar are up nearly 6%, and Club name Home Depot is cruising too. Industrial machinery marker Caterpillar is up more than 4.5%, and Club stock DuPont , which is in the materials cohort, is up almost 4%. The economically sensitive Dow Jones Industrial Average is outperforming the S & P 500 and touching fresh all-time highs following Powell’s speech. While the tech-heavy Nasdaq is performing about in line with the Dow on Friday, it still may actually finish the week in the red. That’s because it got dinged up earlier this week during a market rotation out of momentum stocks like Palantir into rate-sensitive cyclical stocks — many of which are in the Dow, leading to the blue-chip index’s relative outperformance in the first part of the week. As the Nasdaq lost 2.1% over Tuesday and Wednesday’s sessions, the Dow was basically flat. The lesson in all this: You can’t always lean on the textbook. Yes, lower rates are beneficial to equity valuations, and that has historically been better for growth stocks, many of which are in the tech cohort, because it clears the way for investors to focus more on future earnings. This dynamic held true during the near-zero rate days of the pandemic. However, in the real world, we have to consider what other investors are thinking about — you need to be as much a psychologist as you are a financial statement analyst. In the current moment, the thought process is not that a September rate cut will allow folks to pay 300 times earnings for Palantir instead of 250. Rather, investors need to be focusing on which companies will see their earnings estimates revised higher into year-end, an enticing setup that gets investors interested in those stocks. Right now, it’s the cyclical names, like those tied to the housing market that are most likely to get those upward revisions on the back of a dovish Fed speech. That’s why you’re seeing Home Depot jump more than 4%, ahead of Palantir and even fellow portfolio stock known for its momentum-driven nature in Nvidia . (Jim Cramer’s Charitable Trust is long HD and NVDA. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
