Fed Pivot Sparks Earnings Momentum

1. Jackson Hole Fed Pivot. The Federal Reserve’s policy stance shifted meaningfully this week as Chair Jerome Powell adopted a more dovish tone than expected at Jackson Hole. Powell noted that the recent softening in the labor market, coupled with tariff-related price adjustments now viewed as one-time in nature, has created the conditions for a more accommodative policy path. The outcome is a material change in expectations: where markets had previously anticipated one to two cuts in 2025, the current consensus now reflects the potential for three rate cuts before year-end.

This pivot represents a decisive reversal in Fed policy and marks the first clear signal that restrictive monetary conditions may soon ease. The implications for markets are immediate. Historically, pivots toward easing have served as a tailwind for risk assets, and the sectors best positioned to benefit include housing, financials, commodities, consumer discretionary, and small-cap equities. While the trajectory of future labor and inflation data will inform the Fed’s pace, markets are forward-looking and have already begun to reprice for looser policy.

2. Economy Stays Resilient. The broader economic backdrop continues to display resilience in the face of multiple headwinds. Despite concerns over tariffs, geopolitics, inflation, and monetary policy, the Atlanta Fed’s GDP tracker remains steady in a 2.0%–2.5% range. This stability underscores the U.S. economy’s capacity to absorb shocks without sacrificing its underlying momentum. Specifically, the PMI Composite Index hit highs not seen since December of 2024 and the Manufacturing segment rose to the best level since 2022. Chase credit card data showed that spending in August rose 4.9% y/y vs July up 4.2% – so an acceleration led by the Gen Z and Millennial cohorts. Month to date discretionary spend rose 6.4% vs non-discretionary which rose 2.4%.

Earnings trends further reinforce the positive narrative. 95% of the S&P 500 have reported with an 11% year-over-year earnings increase alongside 6% revenue growth, with management teams issuing guidance that reflects both confidence and durability. This combination of double-digit earnings growth and mid-single-digit revenue expansion points to improving operating leverage and margin expansion. Equity markets are ultimately earnings-driven, and the prospect of sustained earnings momentum into 2025 provides a strong foundation for continued equity market appreciation.

3. Cyclical Opportunity in Housing. The structural imbalance between supply and demand in housing is significant, with the U.S. estimated to be 5 million homes short following 15 consecutive years of underproduction from homebuilders. This shortage is magnified by demographic tailwinds, particularly demand from millennials, of whom approximately 5 million are prepared to purchase homes in the coming years.

The affordability barrier is beginning to ease as mortgage rates decline. The 30-year fixed mortgage rate fell to 6.65% last week, the lowest since September 2024. This reduction materially improves affordability and acts as a tailwind for both sales volumes and builder margins, as fewer incentives are required to stimulate demand.

Within the sector, homebuilders continue to deliver favorable results. D.R. Horton (DHI), whose exposure to first-time buyers represents 57% of its book, reported stronger-than-expected gross margins, demonstrating pricing discipline and effective cost control. Toll Brothers (TOL), catering to the higher-end segment, reported upside surprises in both deliveries and margins. Valuations remain attractive, with DHI trading at 12x forward earnings and TOL at 10x, suggesting ample room for rerating as demand strengthens and rates ease further.

4. Consumer Back-to-School Strength. Consumer spending remains robust, with back-to-school shopping providing an early read-through into the upcoming holiday season. Several of the largest retailers have reported solid performance, demonstrating resilience despite tariff-related cost pressures. Stable employment, rising wages, and the emerging benefit of lower rates are combining to support discretionary demand. Retailers are adapting effectively to tariff dynamics while sustaining profitability and expanding high-margin revenue streams.

Walmart (WMT) delivered broad-based strength across channels. Pricing discipline was evident, with overall prices up only 1% year-over-year despite tariffs, supported by over 7,000 rollbacks, including a 30% increase in grocery rollbacks. This enabled the company to gain dollar share in key categories. Growth initiatives were strong: global e-commerce sales rose 25%, advertising revenue increased 50%, and membership income advanced 15%. Omni-channel capabilities continue to differentiate Walmart, with delivery from store up nearly 50% and curbside pickup at Sam’s Club growing at a double-digit pace.

Target (TGT) reported results that positioned the company more favorably than initially perceived. Discretionary sales improved by 400 basis points from Q1 to Q2, and shrinkage declined back to pre-pandemic levels. Management absorbed the bulk of tariff-related costs through one-time charges, limiting ongoing margin drag. The quarter also marked a significant leadership change as Michael Fiddelke, formerly COO, was unanimously elected CEO. While some investors may have preferred an external candidate to bring a fresh perspective, continuity in leadership should provide stability as the company executes its turnaround. Michael outlined three strategic priorities: reestablishing merchandising authority, ensuring customers find joy in the in-store experience, and leveraging technology to enhance speed and efficiency.

5. Fixed Income. U.S. Treasury yields declined across the curve last week in response to dovish commentary made by Fed Chair Jerome Powell at the annual Jackson Hole Economic Symposium. Powell’s remarks, which hinted at a potential shift towards rate cuts as early as September, catalyzed a broad-based rally in the Treasury market. By Friday’s close, yields on the 2-, 10-, & 30-year yields were lower by 5, 6, & 4 basis points, respectively. The market now shifts focus to this week’s data releases, including new home sales, consumer confidence, and the core PCE deflator, which will provide some insight into the economy’s trajectory.

Investment-grade and high-yield spreads moved wider last week. Investment-grade spreads broadened 2 basis points to + 117, while high-yield spreads expanded 3 basis points to +338. U.S. credit quality improved as the main rating agencies issued 47 upgrades and 41 downgrades. The Financial sector accounted for the majority of the upgrades, while the Consumer Discretionary sector led with the most downgrades.

The tax-exempt curve steepened last week as the front-end of the curve was lower by 1-4 basis points, while the long end of the curve rose 5-6 basis points, respectively. This week’s primary market is expected to remain supportive, underpinned by a manageable $6.6 billion in tax-exempt supply. Notably, this marks the lowest non-holiday issuance volume since the week of April 7th.

The Week Ahead.

Economics- Monday: Housing and Construction, Central bank, Thursday: Labor Market, Central Bank, Friday: Wholesaler Sales, PCE

Earnings –Wednesday: SJM, WSM, HPQ, HPQ, A, CRD, COO, NVDA, NTAP Thursday: BBY, DG, HRL, DELL, ULTA, ADSK

Stephanie Link’s TV Schedule:

Return for Selected Indices

Disclosure
Investment Solutions is a group comprised of investment professionals registered with Hightower Advisors, LLC, an SEC registered investment adviser. Some investment professionals may also be registered with Hightower Securities, LLC, as a member FINRA and SIPC. Advisory services are offered through Hightower Advisors, LLC. Securities are offered through Hightower Securities, LLC. This is not an offer to buy or sell securities. No investment process is free of risk, and there is no guarantee that the investment process or the investment opportunities referenced herein will be profitable. Past performance is neither indicative nor a guarantee of future results. The investment opportunities referenced herein may not be suitable for all investors. All data or other information referenced herein is from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other data or information contained in this presentation is provided as general market commentary and does not constitute investment advice. Investment Solutions and Hightower Advisors, LLC or any of its affiliates make no representations or warranties express or implied as to the accuracy or completeness of the information or for statements or errors or omissions, or results obtained from the use of this information. Investment Solutions and Hightower Advisors, LLC assume no liability for any action made or taken in reliance on or relating in any way to this information. The information is provided as of the date referenced in the document. Such data and other information are subject to change without notice. This document was created for informational purposes only; the opinions expressed herein are solely those of the author(s) and do not represent those of Hightower Advisors, LLC, or any of its affiliates.