After Powell's speech, bull market or stagflation?

The Federal Reserve may cut interest rates in September and hint at further easing measures to come. Behind this wave of enthusiasm, the market is facing a complex macroeconomic environment. What will happen to the US stock market in the future? On August 24, 2025, global financial markets were stirred by Federal Reserve Chairman Jerome Powell's speech at the Jackson Hole annual symposium. This led to speculation that the Fed might cut interest rates in September and hint at further easing measures. This statement was interpreted by the market as "rocket fuel," driving a rally in stocks, commodities, and cryptocurrencies. However, behind this wave of enthusiasm, the market is facing a complex macroeconomic environment: resurgent inflationary pressures, a weak job market, artificial intelligence (AI)-driven economic growth, and the potential risk of stagflation. Rate Cut Speculation Heats Up Markets In his speech, Powell explicitly stated that current inflation risks are tilted to the upside, while labor market risks are tilted to the downside. He stated that the Fed's dual mandate (controlling inflation and promoting employment) is facing challenges, but that monetary policy is currently in a "constrained zone" and may need to adjust its stance to respond to economic changes. Key phrases included: "Shifts in the outlook and the balance of risks may require adjustments to our policy stance." This statement was interpreted by the market as a clear signal of a rate cut cycle, potentially involving more than just a single cut. According to market data, the probability of a 25 basis point rate cut in September has soared from around 50% before the speech to 77%, and some analysts predict that this probability may rise further to over 80% next week. This expectation sparked widespread optimism in the market, driving a broad rally in risky assets. The market reacted swiftly after Powell's speech: the S&P 500 index closed above a key level on Friday, approaching 6,500 points and approaching its all-time high. The Russell 2000 index performed particularly strongly, rising 3.9%, reflecting the market's favor for small and mid-cap stocks. Over 40% of these companies are unprofitable, and interest rate cuts will significantly reduce their borrowing costs, driving up valuations. Gold prices hit $3,375 per ounce, nearing the critical resistance level of $3,450; silver rose 1.97%, testing its recent high of $3,950. Oil prices also rebounded, with the energy sector becoming a bright spot. Bitcoin broke through short-term resistance at $112, breaking out of its downward trend; Ethereum surged 15%, hitting a recent high, demonstrating a strong market appetite for risky assets. Market performance reflects an accelerated sector rotation. While technology stocks remain strong, funds are beginning to flow into previously underperforming energy, industrial, and small- and mid-cap stocks. This rotation suggests that investors are reallocating assets to prepare for the interest rate cut cycle and potential changes in the economic environment. The threat of stagflation is becoming more prolonged. Although the Federal Reserve has successfully kept inflation around 2% over the past two years, recent data shows signs of rising inflation. According to the latest data, the US consumer price index has gradually rebounded over the past three months, partly due to increased supply chain costs caused by tariffs. For example, a Goldman Sachs report indicates that most suppliers are expected to pass on tariff costs starting in October, pushing up commodity prices. Retail giants like Walmart have warned of potential price increases for food and daily necessities. In his speech, Powell explicitly stated that the Federal Reserve will temporarily suspend its 2% inflation target and prioritize the job market. This decision has fueled market concerns about stagflation, a historical dilemma characterized by the coexistence of economic stagnation and inflation. Stagflation could lead to outperformance for commodities like gold and oil, while weighing on the long-term outlook for the stock market. Employment market data suggests a softening in the US labor market. Revisions to non-farm payroll data suggest that job growth over the past year was overestimated, with actual job creation falling short of expectations. The widespread adoption of AI has exacerbated this trend, with many companies reducing labor costs through automation, leading to job losses in some industries. However, AI is also a key driver of economic growth. A recent Goldman Sachs report indicates that US GDP growth is expected to reach 2.5% in 2025, with AI-related industries contributing over 30%. For example, Nvidia, a leading AI chip company with a market capitalization exceeding $3 trillion, has become a market bellwether. Nvidia's upcoming earnings report, due on Wednesday, is expected to trigger a 7-8% stock price swing, impacting tens of billions of dollars in market capitalization. The risk of stagflation is a core concern in the current market. If the Federal Reserve continues to cut interest rates and inflation fails to be effectively controlled, the market could enter a period of high volatility. Historically, stagflationary environments have typically benefited commodities (such as gold and oil) and some cryptocurrencies (such as Bitcoin), but have put pressure on consumer goods and industrial sectors. The consumer goods and industrial sectors of the S&P 500 have recently seen an increase in bankruptcy filings, indicating structural problems within the economy. Tech stocks diverge, commodities and crypto assets rise. Technology stocks remain the core market driver. The S&P 500's gains were primarily driven by tech giants, with companies like Nvidia and Tesla performing particularly well. However, there is divergence within the tech sector: software-related tech stocks have recently weakened, while hardware and AI-related companies continue to perform strongly. Meanwhile, the strong performance of the Russell 2000 Index suggests that funds are flowing into small and mid-cap stocks. Expectations of interest rate cuts have lowered borrowing costs for these companies, driving up valuations. However, the higher risk profile of small and mid-cap stocks also implies greater volatility, requiring investors to exercise caution. The rise in gold and silver prices reflects market expectations of inflation and a weakening dollar. If gold breaks through $3,450, it could test above $3,500, while silver is expected to reach its all-time high of $4,243. The oil market also saw unusual activity, with bullish positions among oil hedge funds falling to a 17-year low, reflecting market disagreement on the outlook. However, if stagflation expectations intensify, oil prices could rebound. Risk of a Market Pullback Under Pressure Historically, Federal Reserve rate cuts near record highs have generally been positive for the stock market. Data from Carson Research shows that the probability of a market rise or fall is 50/50 one month after a rate cut, but the probability of gains increases to 77% and 100% over the following two and three months, respectively. This suggests that the market's upward momentum is likely to continue in the short term, but September, as the weakest month in history, may bring some correction pressure. Nvidia's earnings report will be a key catalyst this week. If it exceeds expectations, it could drive further gains in tech stocks; if it falls short, it could trigger a market correction. Furthermore, market performance is typically weak after Labor Day, so investors should be aware of potential risks in mid-September. Jerome Powell's Jackson Hole speech injected new vitality into the market, and rising expectations of rate cuts drove gains across stocks, commodities, and cryptocurrencies. However, inflationary pressures, a weak job market, and AI-driven structural changes in the economy have created market uncertainty. Over the next one to three months, changes in market structure will determine whether we enter a full-blown bull market or fall into stagflation. For investors, the current market offers abundant opportunities, but also carries significant risks. The rotation toward technology and small- and mid-cap stocks, the safe-haven properties of commodities, and the high volatility of cryptocurrencies all warrant attention. Through flexible asset allocation and strict risk management, investors can seize opportunities during this critical period and ride the market's next wave.