The recent rally in the US stock market has raised concerns about a possible bubble, mainly due to the lack of pullbacks. Growth expectations are driving this rally, influenced by previous tariffs. When the tariffs were paused and interest rates were cut, market sentiment improved, leading to better growth expectations despite some earlier negative reports.

Federal Reserve and Market Expectations

Looking ahead to the second half of 2025, the Federal Reserve will be a key factor. A somewhat cautious decision from the FOMC and weak labor market data have tempered growth expectations. However, optimistic comments and the possibility of rate cuts have renewed bullish momentum. The Fed’s actions are essential because the flow of liquidity—not just corporate earnings—moves the market. Currently, the market is expecting 112 basis points of rate cuts by 2026, exceeding the Fed’s projection of 75 basis points. If the Fed adopts a more conservative outlook, it could cause a market pullback. Strong US economic data could trigger this change, presenting a buying opportunity for those waiting on the sidelines. Despite concerns, significant pullbacks are unlikely unless inflation worries rise, prompting the Fed to increase rates. Until then, the Fed’s supportive stance should limit any market declines. Previous bubbles, like the dot-com crash, highlight the risks of rising rates; however, with current Fed support, investors remain cautiously optimistic. This market rally began with the reversal of aggressive tariffs earlier this year and is now backed by the Federal Reserve. After a stagnant summer, the Fed’s dovish remarks, particularly from the Jackson Hole symposium in August, have brought new liquidity and optimism. The focus has shifted from trade policies to monetary policies.

Market Expectations vs. Federal Projections

The central bank’s liquidity is the main influence, not corporate earnings. The Fed is supporting both the economy and the markets, and it’s wise not to oppose that trend. Problems arise only when the economy overheats, forcing the Fed to withdraw support and go against the market. Currently, there is a significant tension because the market is anticipating more rate cuts than the Fed forecasts. As of September 22, 2025, futures indicate 112 basis points of cuts by the end of 2026, while the Fed suggests only 75 points. This discrepancy means the market may be too optimistic and sets the stage for a pullback. Strong US economic data could trigger this pullback, aligning the market with the Fed’s more cautious stance. It’s important to monitor the Non-Farm Payrolls report expected in the first week of October. After the weaker labor data in August, a surprisingly strong jobs report could lead to a hawkish adjustment and create the dip that many are anticipating. Any pullback is likely to be a buying opportunity rather than the beginning of a significant downturn. For derivatives traders, this may involve buying short-term puts before crucial data as a hedge or selling cash-secured puts at lower strike prices to take advantage of a dip. The Fed’s emphasis on the labor market should help prevent major declines. This current situation contrasts sharply with the dot-com bubble of 2000, when the Fed was raising rates and hindering market growth. Today, the Fed is providing support, which suggests that bubbles could be something to take advantage of. The true bear market signal will appear only if inflation, currently slightly rising with the last CPI report at 3.4%, becomes a serious issue that forces the Fed to raise rates. Create your live VT Markets account and start trading now.

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