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Fed Watch: Will Jerome Powell Goose the Stock Market?
The Federal Reserve will conclude its most contentious FOMC meeting of the year this afternoon, and the outcome has the potential to meaningfully sway markets. There is a real possibility this turns into a “sell the news” event, but if that happens, I also see several areas where investors may want to consider rotating.
Just a month ago, futures were pricing the odds of a rate cut at roughly 50/50, a shift that triggered a sharp bout of volatility. Indexes ultimately fell only about 6% from their highs, but beneath the surface the damage was much more severe, with many speculative corners of the market getting battered.
Today, the probability of a rate cut is close to 90%, but markets now expect this to be the final move until at least June of next year. That expectation is what concerns me. Stocks have rallied hard in recent weeks as investors positioned for today’s cut, and much of that upside has already been priced in. Even if the Fed delivers, there is a real possibility that the tone of the meeting turns out to be more hawkish than the market is prepared for.
Chair Jerome Powell has consistently taken a measured, conservative approach throughout his tenure, especially when it comes to communication. With the market already assuming a pause after this cut, he may lean into that narrative. He could emphasize that policy rates are very close to the appropriate level, that inflation and employment are near their targets, and that the committee will remain data dependent from here.
If Powell strikes a more hawkish tone, the have a bearish response. A restrictive message would imply less liquidity ahead and could cool some of the enthusiasm that has driven stocks higher into the meeting. In that case more defensive sectors like healthcare (XLV - Free Report) and energy (XLE - Free Report) may be safe havens in the months ahead as they been have quietly showing relative strength.
Image Source: CME Group
Healthcare and Energy Stocks Perk Up Ahead of FOMC
Excluding technology ((XLK - Free Report) ), the Healthcare ((XLV - Free Report) ) and Energy ((XLE - Free Report) ) sector ETFs have been the strongest relative performers in the market over the past three months—a meaningful signal from a momentum perspective. Academic research consistently shows that the most effective look-back periods for momentum strategies fall between three and twelve months, placing the current three-month window squarely inside the range where momentum tends to be most predictive.
When applied systematically, momentum has historically generated excess returns across market regimes, and sector rotation remains one of the most reliable ways to capture that edge. This is why I am increasingly favoring healthcare and energy at this stage. Both sectors have been deeply out of favor for the past one to two years, leaving them broadly underowned. If they continue to firm up, investors who have been underweight may be forced to rotate back in, potentially reinforcing the emerging bullish trend.
Image Source: Koyfin
Why Investors May Want to Lean Defensive into Year End
If today’s meeting delivers a rate cut but pairs it with a more restrictive message, the market may need time to digest the implications. A hawkish tone would effectively signal a slower pace of liquidity expansion, and after the strong rebound of the last two weeks, equities may be vulnerable to a period of consolidation or rotation beneath the surface. In that environment, investors often gravitate toward areas of the market that offer steadier earnings profiles, lower volatility, and clearer fundamental visibility.
Healthcare and energy both fit that profile well right now. They have already begun to outperform on a relative basis, they remain broadly underowned after extended periods of neglect, and their leadership is emerging at a moment when the broader market may be shifting into a more selective phase. If the Fed’s message today dampens risk appetite or tempers expectations for aggressive easing next year, these sectors are positioned to absorb that rotation and potentially strengthen further into year-end.
While the market’s initial reaction this afternoon may be sharp in either direction, the more important development may be the leadership that emerges in the aftermath. If momentum continues to build in healthcare and energy, the next leg of the market could look quite different from the tech and more speculative driven rally that dominated much of the year.
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Fed Watch: Will Jerome Powell Goose the Stock Market?
The Federal Reserve will conclude its most contentious FOMC meeting of the year this afternoon, and the outcome has the potential to meaningfully sway markets. There is a real possibility this turns into a “sell the news” event, but if that happens, I also see several areas where investors may want to consider rotating.
Just a month ago, futures were pricing the odds of a rate cut at roughly 50/50, a shift that triggered a sharp bout of volatility. Indexes ultimately fell only about 6% from their highs, but beneath the surface the damage was much more severe, with many speculative corners of the market getting battered.
Today, the probability of a rate cut is close to 90%, but markets now expect this to be the final move until at least June of next year. That expectation is what concerns me. Stocks have rallied hard in recent weeks as investors positioned for today’s cut, and much of that upside has already been priced in. Even if the Fed delivers, there is a real possibility that the tone of the meeting turns out to be more hawkish than the market is prepared for.
Chair Jerome Powell has consistently taken a measured, conservative approach throughout his tenure, especially when it comes to communication. With the market already assuming a pause after this cut, he may lean into that narrative. He could emphasize that policy rates are very close to the appropriate level, that inflation and employment are near their targets, and that the committee will remain data dependent from here.
If Powell strikes a more hawkish tone, the have a bearish response. A restrictive message would imply less liquidity ahead and could cool some of the enthusiasm that has driven stocks higher into the meeting. In that case more defensive sectors like healthcare (XLV - Free Report) and energy (XLE - Free Report) may be safe havens in the months ahead as they been have quietly showing relative strength.
Image Source: CME Group
Healthcare and Energy Stocks Perk Up Ahead of FOMC
Excluding technology ((XLK - Free Report) ), the Healthcare ((XLV - Free Report) ) and Energy ((XLE - Free Report) ) sector ETFs have been the strongest relative performers in the market over the past three months—a meaningful signal from a momentum perspective. Academic research consistently shows that the most effective look-back periods for momentum strategies fall between three and twelve months, placing the current three-month window squarely inside the range where momentum tends to be most predictive.
When applied systematically, momentum has historically generated excess returns across market regimes, and sector rotation remains one of the most reliable ways to capture that edge. This is why I am increasingly favoring healthcare and energy at this stage. Both sectors have been deeply out of favor for the past one to two years, leaving them broadly underowned. If they continue to firm up, investors who have been underweight may be forced to rotate back in, potentially reinforcing the emerging bullish trend.
Image Source: Koyfin
Why Investors May Want to Lean Defensive into Year End
If today’s meeting delivers a rate cut but pairs it with a more restrictive message, the market may need time to digest the implications. A hawkish tone would effectively signal a slower pace of liquidity expansion, and after the strong rebound of the last two weeks, equities may be vulnerable to a period of consolidation or rotation beneath the surface. In that environment, investors often gravitate toward areas of the market that offer steadier earnings profiles, lower volatility, and clearer fundamental visibility.
Healthcare and energy both fit that profile well right now. They have already begun to outperform on a relative basis, they remain broadly underowned after extended periods of neglect, and their leadership is emerging at a moment when the broader market may be shifting into a more selective phase. If the Fed’s message today dampens risk appetite or tempers expectations for aggressive easing next year, these sectors are positioned to absorb that rotation and potentially strengthen further into year-end.
While the market’s initial reaction this afternoon may be sharp in either direction, the more important development may be the leadership that emerges in the aftermath. If momentum continues to build in healthcare and energy, the next leg of the market could look quite different from the tech and more speculative driven rally that dominated much of the year.