Just when you thought American consumers might be tapped out, they’ve pulled out their wallets and reminded us that shopping is still the national pastime. Meanwhile, corporate profits are robust, the Federal Reserve is poised to cut interest rates, and stocks hover near all-time highs. What’s not to love?

Retail bellwethers Target (NYSE: TGT) and Walmart (NYSE: WMT) beat second-quarter earnings expectations this season. In an encouraging sign of market breadth, small-cap stocks are surging and cyclicals are rotating into the market leadership.

Investors anticipate that Fed Chair Jerome Powell will signal the start of a rate-cutting cycle during his Friday speech at Jackson Hole, Wyoming.

Further bolstering the bull case, the Federal Open Market Committee (FOMC) minutes from its July meeting revealed that a “vast majority” of members viewed a September rate cut as appropriate.

With stocks now just shy of record highs, it appears that the market’s uptrend remains intact, even if trading gets a bit bumpy in the near term due to lingering uncertainties such as the U.S. presidential election.

All eyes on Jackson Hole…

The big moment in the Grand Tetons is just around the corner. On Friday morning, Chair Powell will take the stage at the Fed’s annual symposium, where major policy shifts have been unveiled in the past.

This year, Powell is expected to confirm the likelihood of a September rate cut, kicking off efforts to normalize policy after the most aggressive tightening we’ve seen in four decades. Policymakers are growing more confident that inflation is headed in the right direction, giving them some breathing room to focus on the Fed’s second mandate: maximum employment.

Last month’s headline consumer price index (CPI) dipped below 3% for the first time in over three years, and the labor market is showing clear signs of cooling down. That said, “emergency” rate cuts are probably unnecessary, especially since inflation remains above target. Realistically, we’re looking at two to three quarter-point rate cuts this year, depending on how growth and inflation evolve.

A Fed rate cut next month would benefit rate-sensitive sectors such as technology, utilities, real estate, consumer discretionary, homebuilding, and financials.

While traditional banks might face pressure on margins due to lower rates, investment banks and asset managers should benefit from increased market activity and higher asset prices, driven by lower rates and more favorable borrowing conditions.

As earnings season winds down, with 95% of S&P 500 companies having reported, it’s clear that the second-quarter results have been strong.

An impressive 79% of companies beat analyst estimates by an average of 4%, and the index posted an 8.3% earnings growth for the quarter, a slight uptick from Q1.

This earnings season also saw a broadening of market leadership. Excluding the “Magnificent Seven,” S&P 500 earnings growth turned positive for the first time in five quarters.

Nine of the 11 sectors recorded positive growth, with utilities, health care, and financials delivering the biggest surprises.

Recession fears on the wane…

It’s interesting to note that on earnings calls this season, corporate managers don’t seem overly concerned about a recession.

FactSet this season deployed its Document Search tool to look for the word “recession” in the conference call transcripts of all the S&P 500 companies that conducted earnings conference calls from June 15 through August 15.

Among these companies, 28 cited the term “recession” during their earnings calls for the second quarter. This number is well below the five-year average of 83 and the 10-year average of 60.

In fact, this quarter marks the second-lowest number of S&P 500 companies citing recession on earnings calls for a quarter since Q4 2021 (15). The following chart tells the story:

The upshot: Corporate profits and the overall economy are on solid ground, supporting the bull market. And with earnings growth spreading beyond the mega-cap tech giants, we’re poised for a broader market rally, giving the laggards a chance to catch up. Calibrate your portfolio accordingly.

As investors waited with bated breath for Jerome Powell’s Jackson Hole remarks, the main U.S. stock market indices skidded lower Thursday as follows:

• DJIA: -0.00%
• S&P 500: -0.89%
• NASDAQ: -1.67%
• Russell 2000: -0.95%

Mega-cap tech stocks weighed on the markets. The benchmark 30-year U.S. Treasury yield popped higher by 2.05%, to settle at 4.13%. Get ready to parse Powell’s words on Friday.

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