July 20, 2025

QuickTakes

MARKET CALL: What If the Fed Hints At

A September Rate Cut Next Week?

The odds of a Federal Reserve rate cut at the July 29-30 FOMC meeting are down to 4.7% based on futures pricing from the CME FedWatch Tool. A strong June jobs report, which added 147,000 nonfarm payrolls and showed the unemployment rate drop to 4.1%, has significantly reduced expectations for a July cut. Fed Chair Jerome Powell and other Fed policymakers have emphasized a cautious, data-dependent approach, citing persistent inflation above the 2% target and uncertainties from tariffs. Most market participants and analysts now expect the Fed to hold rates steady at 4.25%-4.50%, with a September cut being more likely, at 60.7% probability.

The latest batch of weaker-than-expected inflation reports, including the drop in July's expected inflation series, might persuade Fed Chair Jerome Powell and his colleagues to signal they are leaning toward lowering the federal funds rate at the September 16-17 meeting, as markets expect (chart).

We expect a more dovish tone from next week's FOMC statement and Powell's press conference. If so, that would continue to fuel the bull market in stocks, especially since the Q2 earnings reporting season should continue to beat expectations. The blended (actual/estimated) S&P 500 earnings per share growth rate edged up to 4.3% y/y last week (chart). It should be closer to 8.0% when all the results are in.

Additionally, industry analysts have begun to upgrade their earnings estimates for both 2025 and 2026 (chart). Furthermore, S&P 500 forward earnings per share reached another record high of $284.36 last week. We are still targeting $300 for this series by the end of the year. The current forward P/E of 22.1 would put the S&P 500 index at 6630 by the end of this year.

Analysts are turning more optimistic about the companies they follow. The percentage of S&P 500 companies with positive three-month percent changes in forward earnings has increased from 57% in early April to 75% currently (chart).

The S&P 500 forward P/E could continue to rise led by the Magnificent-7's valuation multiple (chart). It's also possible that the forward P/E of the S&P 493 will increase. We would rather see the market move higher on earnings than on higher valuation, which would increase the risk of a meltup followed by a correction, as we saw at the beginning of this year.

Our Blue Angels analysis indicates that the S&P 500 continues to follow the lead of its forward earnings to fresh record highs despite the recent volatility in its forward P/E (chart).

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