Rebound rally in stocks shows that "dip buyers are back in force" - Yardeni

Investing.com - A recovery in U.S. stocks on Monday is a sign that dip buyers are "back in force" as expectations grow for impending Federal Reserve interest rate cuts, according to analysts at Yardeni Research.

The main averages on Wall Street surged to begin the new trading week, recovering from a deep sell-off on Friday sparked by trade developments and soft U.S. employment numbers from the Bureau of Labor Statistics.

President Donald Trump later dismissed the commissioner of the BLS over heavy downward revisions to the totals for June and May, which cast a pall over recent hopes that the U.S. economy was weathering any possible headwinds from the White House’s aggressive tariff agenda.

Still, bets that a cooling jobs picture could persuade the Fed to slash borrowing costs as soon as its next meeting in September helped to underpin sentiment. The probability of a September reduction now stands at around 90%, versus roughly 63% a week ago, CME’s FedWatch Tool showed.

According to the Yardeni analysts, investors are now trying to discern the staying power of Monday’s rebound rally.

"The question now is: Will the S&P 500 meander during August and drift lower during September and then resume its climb in a year-end rally along with its 10-year average? Or will it continue to set record highs over the next two months and keep going through the end of the year?" the analysts wrote in a note.

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Key events for markets lie ahead, they added, including Trump’s potential appointment of a new BLS commissioner and name his pick to fill a fresh vacancy at the Fed. Legal challenges to Trump’s tariffs may also be ruled on in the coming weeks, while July’s consumer-price data could be hotter-than-anticipated if the levies continue to fuel price growth in durable goods, the analysts said.

Fed Chair Jerome Powell, a frequent recipient of criticism from Trump, who has called on the Fed to quickly slash rates to boost the economy, is also due to speak at the annual Jackson Hole conference on August 23. Meanwhile, another inflation report and monthly jobs data are also due out prior to the September Fed gathering.

The Yardeni analysts anticipated that growth in the second half will accelerate compared to the first six months of 2025. They argued that the weak payrolls reflected a "shortage of workers that will be more than offset by productivity growth."

But inflation is tipped to show more tariff-related increases over the next few months, possibly impacting the Fed’s ability to cut interest rates despite the softer jobs picture, the analysts said.

"One or two rate cuts this year aren’t likely in our base-case scenario," they added.

The S&P 500 is predicted to end the year at between 6,500 - 6,600, but could rise to 6,900 in a "melt-up scenario," the analysts said. On Monday, the index closed at 6,329.94.

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