Investing.com – Jerome Powell’s recent speech at the Jackson Hole symposium has sparked a reaction in financial markets, with many analysts believing his dovish tone could lead to further gains in an already overheated stock market.

The comments by the chair of the US Federal Reserve seem to confirm widespread expectations of an impending interest rate cut, which could have far-reaching consequences for both the stock markets and the economy as a whole.

Powell’s speech was interpreted by many as dovish and signaled the Fed’s willingness to cut interest rates in the near future.

“This was also clearly positive for the stock market as it confirmed widespread expectations that the September key interest rate cut is a done deal and that several more cuts will follow,” analysts at Yardeni Research said in a note.

This is in line with market expectations, which are pricing in multiple rate cuts as the Fed tries to manage easing inflation without triggering a recession.

Investors interpreted Powell’s comments as a green light for further gains, especially in interest rate-sensitive sectors.

The expectation of lower interest rates tends to lead to higher stock prices as borrowing costs fall, corporate profits potentially rise, and the relative attractiveness of stocks compared to fixed income assets increases.

Although Powell’s dovish stance has had a positive impact on the stock market, there is a growing feeling that the market may have already largely priced in the expected rate cuts.

“In addition, we believe stronger than expected economic news is likely in the coming weeks. If that is the case, it could dampen expectations for a rate cut,” the analysts said.

Yardeni Research remains optimistic, however, and sticks to its base scenario “Roaring 2020s.” They assign a subjective probability of 60% to this forecast. According to this, the S&P 500 should reach 5,800 by the end of this year, 6,300 by the end of next year, and 6,825 by the end of 2026.

This scenario is supported by an optimistic assessment of earnings growth and a price-to-earnings ratio (P/E) of 21.

The possibility of a stock market crash – a rapid and unsustainable rise in asset prices – has also gained attention. Yardeni Research currently estimates the probability of this scenario at 20%, but following Powell’s speech, it is considering increasing that probability.

A record $6.2 trillion in money market mutual funds (MMMFs), including $2.5 trillion in retail MMMFs, represent significant liquidity that could quickly flow into equities if money market yields decline due to interest rate cuts.

There are already signs that money is flowing into riskier assets such as small-cap stocks, as shown by the Russell 2000 Index. These companies are often more sensitive to interest rate changes, and the expectation of lower rates could spur further investment in this area.

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Another critical aspect is the yield curve, which is steadily disinverting. At the time of Powell’s speech, the spread between 10- and 2-year US Treasuries had shrunk to just -9 basis points.

In the past, recessions and bear markets have been preceded by an inverted yield curve, but Yardeni Research suggests that this time may be different. Unlike in previous cycles, the Fed is cutting rates in response to falling inflation, not a looming financial crisis.

Despite the optimistic outlook, geopolitical risks and inflation concerns cannot be ignored. Yardeni Research also believes that the probability of a 1970s-like scenario is 20% and believes that this could be exacerbated by increasing geopolitical tensions.

For example, recent military action between Israel and Hezbollah has raised concerns about potential disruptions to global oil supplies, and Brent crude prices recovered after Powell’s speech.

Higher energy prices could reignite inflation fears and complicate the Fed’s task of balancing economic growth with price stability, underscoring the ongoing risks that could dampen current equity market optimism.

In terms of insider activity, Yardeni Research said insider buying eased last week as the market recovered from its early August sell-off. However, there was still notable buying in the energy sector, particularly among companies with exposure to the U.S. natural gas and energy services sectors.

In addition, there were worthwhile buys in technology, high dividend yield business development companies and retail, including brick-and-mortar stores, online entertainment, cosmetics and travel-related companies.

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