Stocks Rally Sharply on Dovish Fed Chair Powell

The S&P 500 Index ($SPX) (SPY) on Friday closed up by +1.52%, the Dow Jones Industrials Index ($DOWI) (DIA) closed up by +1.89%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed up by +1.54%.  September E-mini S&P futures (ESU25) rose +1.52%, and September E-mini Nasdaq futures (NQU25) rose +1.55%. 

Stock indexes settled sharply higher on Friday, with the Dow Jones Industrials posting a new all-time high.  Stock prices jumped and bond yields tumbled after comments from Fed Chair Powell opened the door for a Fed rate cut next month.  Fed Chair Powell said downside risks to employment are rising, and the shifting balance of risks may warrant adjusting monetary policy.  The 10-year T-note yield fell to a 1-week low of 4.24% on the comments, and the chances of a Fed rate cut at the September 29-30 FOMC meeting rose to 81% from 71% before Powell spoke. 

Fed Chair Powell said, "The stability of the unemployment rate and other labor market measures allows us to proceed carefully as we consider changes to our policy stance. Nonetheless, with policy in restrictive territory, the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance."

Comments from Boston Fed President Susan Collins on Friday were slightly hawkish, as she noted that US economic growth is slowing, but overall economic fundamentals are solid, with upside risks to inflation and downside risks to labor.  She added that Fed policy is modestly restrictive, which is appropriate.

On the geopolitical front, US Vice President Vance said negotiations over ending Russia's war in Ukraine are focused on security guarantees for Ukraine and territory Russia wants to control, including Ukrainian territory that it currently isn't occupying, as the US tries to broker a peace deal between the two countries. The US is working to set up a meeting between Presidents Putin and Zelensky, and if that meeting goes well, President Trump said he'll look to follow up with a trilateral summit with the leaders.

Regarding tariffs, President Trump widened steel and aluminum tariffs to include more than 400 consumer items that contain the metals, such as motorcycles, auto parts, furniture components, and tableware.  The change went into effect on Monday and did not exclude goods already in transit.  Last Friday, Mr. Trump said, "I'll be setting tariffs next week and the week after on steel and on, I would say chips – chips and semiconductors, we'll be setting sometime next week, week after." Mr. Trump last week said he planned a 100% tariff on semiconductors but would exempt companies that move chip manufacturing to the US.  Mr. Trump also mentioned 200% or 300% tariffs on chips.

In other recent tariff news, Mr. Trump last Tuesday extended the tariff truce with China for another 90 days until November.  On August 6, Mr. Trump announced that he will double tariffs on US imports from India to 50% from the current 25% tariff, due to India's purchases of Russian oil.  On August 5, Mr. Trump said that US tariffs on pharmaceutical imports would be announced "within the next week or so." According to Bloomberg Economics, the average US tariff will rise to 15.2% if rates are implemented as announced, up from 13.3% earlier, and significantly higher than the 2.3% in 2024 before the tariffs were announced.

Federal funds futures prices are discounting the chances for a -25 bp rate cut at 81% at the September 16-17 FOMC meeting, up from 71% Thursday.  The markets are discounting the chances at 55% for a second -25 bp rate cut at the following meeting on October 28-29.

Earnings reports indicate that S&P 500 earnings for Q2 are on track to rise +9.1% y/y, much better than the pre-season expectations of +2.8% y/y and the most in four years, according to Bloomberg Intelligence.  With over 94% of S&P 500 firms having reported Q2 earnings, about 82% of companies exceeded profit estimates. 

Overseas stock markets on Friday settled higher.  The Euro Stoxx 50 rallied to a 5-month high and closed up +0.48%.  China's Shanghai Composite climbed to a new 10-year high and closed up +1.45%.  Japan's Nikkei Stock 225 recovered from a 1.5-week low and closed up +0.05%.

Interest Rates

September 10-year T-notes (ZNU5) on Friday closed up +19 ticks, and the 10-year T-note yield fell -7.2 bp to 4.256%.  Sep T-notes rallied to a 1-week high Friday, and the 1-year T-note yield dropped to a 1-week low of 4.240%.  T-note prices jumped Friday on dovish comments from Fed Chair Powell, who said downside risks to employment are rising and the shifting balance of risks may warrant adjusting monetary policy.  Powell's comments boosted the chances for a 25 bp Fed rate cut to 81% at the September 29-30 FOMC meeting from 71% on Thursday. 

Gains in T-notes are limited by hawkish comments from Boston Fed President Susan Collins, who said modestly restrictive Fed policy is appropriate.  Also, rising inflation expectations are bearish for T-notes after the 10-year breakeven inflation rate rose to a 3-week high on Friday at 2.421%. 

European government bond yields on Friday moved lower.  The 10-year German bund yield fell -3.5 bp to 2.722%. The 10-year UK gilt yield fell from a 2.75-month high of 4.759% and finished down -3.7 bp to 4.693%.

German Q2 GDP was revised lower to -0.3% q/q and -0.2% y/y from the previously reported -0.1% q/q and unchanged y/y.

Swaps are discounting the chances at 2% for a -25 bp rate cut by the ECB at the September 11 policy meeting.

US Stock Movers

Strength in chipmakers supported gains in the broader market.  ON Semiconductor (ON) closed up more than +6% and GlobalFoundries (GFS) and Intel (INTC) closed up more than +5%.  Also, NXP Semiconductors NV (NXPI) and Microchip Technology (MCHP) closed up more than +4%, and ARM Holdings Plc (ARM) closed up more than +3%.  In addition, Advanced Micro Devices (AMD), Texas Instruments (TXN), Marvell Technology (MRVL), ASML Holding NV (ASML), and Qualcomm (QCOM) closed up more than +2%.

The Magnificent Seven megacap technology stocks rallied Friday, a bullish factor for the overall market.  Tesla (TSLA) closed up more than +6%, and Alphabet (GOOGL) and Amazon.com (AMZN) closed up more than +3%.  Also, Meta Platforms (META) closed up more than +2%, and Apple (AAPL) and Nvidia (NVDA) closed up more than +1%.  In addition, Microsoft (MSFT) closed up +0.59%. 

Economic optimism boosted airlines and cruise line operators on Friday.  Norwegian Cruise Line Holdings (NCLH), American Airlines Group (AAL), and Alaska Air Group (ALK) closed up more than +7%.  Also, Carnival (CCL), Delta Air Lines (DAL), and Royal Caribbean Cruises Ltd (RCL) closed up more than +6%.  In addition, United Airlines Holdings (UAL) and Southwest Airlines (LUV) closed up more than +5%. 

Homebuilders and home building supplies moved higher Friday after the 10-year T-note yield fell to a 1-week low, a supportive factor for housing demand.  Builders FirstSource (BLDR) closed up more than +8%, and Mohawk Industries (MHK) closed up more than +7%.  Also, Lennar (LEN), PulteGroup (PHM), DR Horton (DHI), and Toll Brothers (TOL) closed up more than +5%.

Ubiquiti (UI) closed up more than +29% after reporting Q4 revenue of $759.2 million, well above the consensus of $621 million. 

Zoom Communications (ZM) closed up more than +12% after reporting Q2 revenue of $1.22 billion, better than the consensus of $1.20 billion, and raising its 2026 revenue forecast to $4.83 billion-$4.84 billion from a previous estimate of $4.80 billion-$4.81 billion, stronger than the consensus of $4.81 billion. 

Qxo Inc (QXO) closed up more than +7% after Benchmark Company LLC initiated coverage on the stock with a recommendation of buy and a price target of $50.. 

Esab Corp (ESAB) closed up more than +4% after Loop Capital Markets upgraded the stock to buy from hold with a price target of $140.

Intuit (INTU) closed down more than -5% to lead losers in the S&P 500 and Nasdaq 100 after forecasting 2026 adjusted operating income of $8.61 billion-$8.69 billion, the midpoint below the consensus of $8.67 billion. 

CSX Corp (CSX) closed down more than -3% after announcing a joint intermodal service with BNSF to ship between California, North Carolina, and Florida.

Workday (WDAY) closed down more than -2% after reporting an unexpected -$5 million loss in Q2 professional services adjusted gross profit versus expectations of a $9.5 million profit.

Telecommunication stocks were under pressure on Friday.  AT&T (T) and T-Mobile US (TMUS) closed down more than -2%.  Also, Verizon Communications (VZ) closed down more than -1% to lead losers in the Dow Jones Industrials.

Earnings Reports(8/25/2025)

HEICO Corp (HEI), Napco Security Technologies Inc (NSSC), PDD Holdings Inc (PDD), Semtech Corp (SMTC).