At Jackson Hole, Federal Reserve Chairman Jerome Powell, noted that a rate cut may be warranted, as current monetary policy may be holding back economic activity, highlighting growing downside risks in the labor market.. His comments reinforced expectations of an easing of monetary policy in September, pushing stocks and bonds higher, while the U.S. dollar depreciated.

We know that the Fed faces a complex outlook, including a gradual rise in inflation, a slowing labor market and slower economic growth, all amid increased political pressure.

With fed funds futures now discounting a probability around 90% of a September rate cut, we see several factors coming together to support easing:

• While inflation is expected to rise due to tariffs, the slowdown in housing inflation and lower consumer spending should help offset some of the impact, slowing housing inflation and lower consumer spending should help offset some of the impact.
• Weakness in the labor market, in particular, is likely to offset lingering inflation concerns in the Fed's decision making, offset lingering inflation concerns in the Fed's decision making.

What does this mean for investors?

• We expect Powell to support monetary policy easing at the September meeting, unless upcoming data, such as a strong August jobs report or higher than expected inflation, justify keeping monetary policy on hold.unless upcoming data, such as a strong August jobs report or higher-than-expected inflation, warrant keeping monetary policy on hold.
• In this context, putting cash to work makes increasing sense.. Bonds with good credit quality and medium duration are attractive.
• Gradual interest rate cuts have historically been positive for stocks, and the Fed's shift from a tightening to a more neutral policy should help extend the bull market.and the Fed's shift from a tightening to a more neutral policy should help extend the bull market. In U.S. equities, there are opportunities to increase exposure to sectors beyond big tech, such as Healthcare, Utilities and Financials.
• Outside the U.S., prefer emerging markets. Emerging market stocks were flat to down during the rate cuts, but performed much better in the aftermath.
• The resumption of monetary policy easing by the Federal Reserve also supports the weaker dollar stance. also supports the dollar's weaker stance.
• Gold remains a reliable hedge against political risks, with further upside potential.

Interest rates and fixed income

Money markets currently estimate a probability of around 90% that the Fed will cut interest rates at its September meeting.. The Fed has held rates at their current levels all year, following a 100 basis point cut in the fourth quarter of last year.

The market anticipates three quarter percentage point rate cuts through January 2026, beginning in September. The neutral rate (in tone at 3% would be reached by mid-2026).

We believe that market rates will continue to fall, but in a limited way.. Historically, when the Fed resumes its monetary easing cycle after a pause, sovereign bond yields tend to decline in the months that follow. However, we believe that for 10-year Treasuries, moves below 4% would not be warranted given fiscal concerns. Expect a steeper yield curve.

For corporate debt, bond yields are attractive in a context where equity valuations and credit spreads are not, giving Investment Grade income a favorable starting point.This gives Investment Grade income a favorable starting point.

Equities

Stocks tended to show mixed performance as the Fed resumes easing, but would recover after 6 months.

Buying during market declines. Global equities remain resilient, recently hitting record highs, and we anticipate a further rally over the next six to twelve months on the back of Fed easing and strong momentum in capital spending. Investors with an under-allocation to equities should consider adding gradually and take advantage of market declines to increase exposure.

In the U.S., add exposure beyond artificial intelligence/technology in sectors such as Healthcare, Utilities and Financials.

Cyclical sectors should do better than defensive ones. Cyclical sectors tended to lag defensive sectors in the months leading up to the Fed rate cut and continued to disappoint in the months following the resumption of cuts. Longer term, after six months, they tended to outperform.

Increase exposure outside the U.S., especially in emerging markets. Emerging market equities were flat or down during the rate cuts, but performed much better in the aftermath.

Dollar

Reduce excessive exposure to the dollar. After a brief rally, weaker U.S. economic data has led the dollar to give up recent gains. Looking ahead, further weakness in U.S. growth, Fed rate cuts and persistent deficits are expected to weigh on the dollar's performance for the remainder of the year.

 DISCLAIMER

Humberto Mora

Investment, Finance, and Business Manager; Stockbroker