The S&P 500 index surged by 1.1% on Tuesday. It was buoyed by easing geopolitical tensions and positive messages from Federal Reserve Chair Jay Powell. The broad equity index is now within 1% of its record high.
This comes after a ceasefire between Iran and Israel appeared to take hold. Powell also did not rule out a potential rate cut in September. After 12 days of heightened geopolitical anxiety, markets found relief.
The Iran-Israel ceasefire officially came into effect. Despite both parties violating the truce and accusing each other of doing so, the immediate risk of escalation has diminished. The ceasefire provided a much-needed boost to risk assets.
These assets had been whipsawed by the conflict. Oil prices, currencies, and safe havens reacted sharply to new headlines. The tech-heavy Nasdaq Composite jumped 1.4% yesterday.
Five members of the Mag 7 club ended in the green. However, Tesla dropped 2.4% following the unveiling of its robotaxi pilot program. Apple dipped 0.6%.
geopolitical tensions ease
The Dow Jones Industrial Average advanced by 1.2%. In Washington, Fed Chair Jay Powell’s testimony to Congress further fueled the rally.
He indicated that the central bank is closely monitoring signs of disinflation. He did not dismiss the possibility of a rate cut in September. Powell even suggested it could precede the July meeting.
“We’ll get an inflation report before the July meeting,” Powell said. He added, “If inflation stays on a downward trajectory, we’ll get to a place where we can cut rates sooner rather than later.”
The CME FedWatch tool shows a mere 18.6% chance of a rate cut in July. But it shows an 87% probability of a cut in September.
With only four policy meetings left in 2025, the window for rate cuts is narrowing. Powell’s comments alleviated concerns that persistent inflation might force the Fed to maintain higher rates for a longer period. His testimony suggested that the door remains open for the Fed to ease monetary policy if economic conditions permit.
The Fed has held interest rates steady at 4.25% to 4.50% since December. This has allowed the economy to cool modestly. Powell’s testimony continues today in front of the Senate Committee on Banking, Housing, and Urban Affairs.
While inflation has cooled—core PCE stood at 2.5% in April—the Federal Reserve remains reluctant to cut rates. This introduces a cautious tone amid the economic recovery.
