In last week’s newsletter, I mentioned there was a high chance the Fed would cut rates by 0.25%.
And sure enough, Powell delivered.
Stocks hit fresh record highs. Credit spreads tightened to their slimmest since the late 90s. Investors are acting like the Fed just guaranteed a smooth landing.
But here’s the uncomfortable truth: rate cuts don’t magically erase weak job growth, sticky inflation, or trade war fallout.
The Fed trimmed its benchmark rate to 4-4.25% – its first cut since December. Powell justified it as “risk management,” citing a clear slowdown in hiring.
Only 22,000 jobs were added in August, and the Bureau of Labor Statistics just revised employment growth down by almost a million jobs for the past year.
At the same time, inflation hasn’t gone away. Core PCE – the Fed’s preferred measure – is stuck at 2.9%, above target and edging higher thanks to tariffs.
In other words: weaker jobs, but prices still uncomfortably high.
Despite this, Wall Street has turned euphoric. The S&P 500, Nasdaq, and even small caps ripped higher after the cut – even after it was already priced in.
Corporate bonds are rallying so hard that companies are paying less to borrow than some governments. It’s the tightest spread since 1998 – right before the dot-com bubble burst.
Markets are betting on a “Goldilocks” outcome:
- Growth slows, but not enough to trigger recession.
- Inflation drifts down quietly, even with tariffs.
- The Fed cuts rates steadily, keeping liquidity flowing.
That’s a very specific set of assumptions. History says it rarely lines up so neatly.
Here’s what’s more likely:
Jobs deteriorate faster than expected. Once layoffs start showing up in consumer spending, earnings could take a hit. Stocks don’t usually like that.
Inflation proves stickier. If tariffs or a weaker dollar feed through, Powell may not have as much room to cut as markets hope.
Positioning flips. Right now, investors are leaning hard into “risk-on.” But if even one of the above assumptions breaks, the rush to exit could be brutal.
This is why I call the current setup “priced for perfection.” Every asset class – equities, credit, even EM – is moving as if nothing can go wrong. But when everything is priced for the best-case scenario, even a small disappointment can cause outsized pain..
Here’s the nuance:
- Short term: Rate cuts almost always juice risk assets. Lower borrowing costs, more liquidity, and a Fed that looks “supportive” = markets cheer.
- Medium term: Fundamentals still matter. If job growth keeps sliding, consumer spending and earnings will suffer. If inflation re-accelerates, the Fed may be forced to slow its cuts. Either way, today’s “priced for perfection” valuations leave little margin for error.
While we’re seeing all-time highs and companies still putting up decent earnings, I know some people will say I’m just spreading FUD by pointing out the risks. But that’s not the point – it’s about recognising when markets are getting ahead of themselves.
Honestly, I haven’t seen a setup quite like this before: on the surface, everything looks so good – earnings are solid, new tech is booming, and now rates are being cut, which is sending markets up everywhere.
But underneath, the fundamentals are shaky: inflation is still sticky, jobs are weakening, and geopolitical risks are everywhere.
It’s tempting to compare this to the dot-com bubble, but there’s a key difference. Back then, the rally was built on aspirations – companies with no earnings but plenty of dreams.
Today’s AI boom is grounded in real earnings growth from giants like Nvidia and Microsoft. That makes it more believable. But here’s the catch: while tech is delivering, the rest of the economy isn’t.
That’s why this moment feels so strange – everything looks amazing on the surface, but the foundation underneath is fragile – just like me. 😂
Investors are paying top dollar for an economy that looks far from top form. That doesn’t mean markets will collapse tomorrow – it means the risk-reward is skewed. Gains from here depend on everything going right, and history tells us it rarely does.
The cut we’ve all been waiting for did happen – but the real story isn’t the cut itself.
It’s how much faith markets are putting in the Fed to engineer a perfect soft landing.
That faith may buy more rallies in the coming weeks, especially if Powell keeps easing. But the cracks underneath – weak jobs, sticky tariffs, an overstretched credit market – haven’t gone away.
So here’s my takeaway: enjoy the party, but don’t mistake it for a new bull market.
The music may keep playing for a while, but when it stops, you don’t want to be the one left dancing without a chair (I felt so poetic writing this line).
Stay patient, stay balanced – and remember: rate cuts are a sugar high, not a cure.