Fed's dovish stance buoyed the stock market

US Dollar

Buy the rumours, sell the facts. The US dollar was actively sold ahead of the announcement of the Fed meeting results. Investors expected the central bank to cut rates, with the FOMC's updated forecasts showing two more acts of monetary expansion before the end of 2025, and the number of dissenters increasing from two in July to three.

In reality, only the first two expectations were met. The September forecast did indeed include two more rate cuts this year. The Fed lowered the rate by 25 basis points to 4.25% with 11 votes out of 12. Only the recently appointed president, Stephen Miran, voted for a 50 bp cut. However, after the initial downward impulse, the USD index went on a counterattack.

The US dollar's success is primarily due to the closing of short positions. Fundamentals still do not favour the dollar. The Fed, as it did at the end of last year, will cut rates. The ECB and the Bank of England will leave them unchanged, while the Bank of Japan may raise them. Divergence in monetary policy encourages a strategy of selling the dollar’s rebounds.

Stock indices

Buying the dips in the S&P 500 is the most popular strategy in 2025. Bulls are lining up to pick up American stocks after the broad stock index fell following the September FOMC meeting and Jerome Powell's comments. According to him, the Fed cannot avoid taking risks in a bilateral risk environment.

Over the past 50 years, the S&P 500 has risen in 13 out of 16 cases over a 6-week horizon if two conditions were met. The Fed cut rates, and the broad stock index was within 1% of its record high. History inspires bulls in US stocks.

At the same time, it is not wise to talk about a bubble. Over the past 12 months, the S&P 500 Information Technology Index has risen 27%, and the profits of its constituent issuers have risen 26.9%. For the rest of the broad stock index, these figures are 13% and 6.4%. If the market is overbought, it is outside of technology companies.

For the first time since November last year, the Russell 2000, an index of small-cap companies, has broken its historical record. It has borne the brunt of trade isolationism combined with the Fed's restrictive monetary policy. The current peak is 0.3% above the highs of November 25, which were also only 0.3% above the peak of November 8, 2021. For comparison, the S&P 500 is now up 10.6% and 41% from those dates, and the Nasdaq 100 is up 17% and 49.7%, respectively. The main question for investors now is whether the Russell 2000 is sending a new signal of a market reversal by touching these highs, or whether it will catch up with the leaders.