US Stocks Edge Higher Amid Fed Pivot Bets and Economic Contraction Signals
US equity markets posted modest gains on Thursday as investors balanced weaker macroeconomic signals with renewed speculation about an earlier-than-expected shift in Federal Reserve policy. The S&P 500 rose 0.4%, moving within reach of record levels, while the Nasdaq 100 climbed 0.5%, extending its all-time highs set just the previous day. The Dow Jones Industrial Average gained more than 200 points, buoyed by broad-based optimism across sectors, driven by the belief that mounting signs of economic softness could accelerate the Fed’s timeline for easing monetary policy.
The primary market catalyst was growing speculation of a Fed policy shift, reinforced by a Wall Street Journal report suggesting that President Trump is considering naming his preferred successor to Federal Reserve Chair Jerome Powell ahead of the official nomination cycle, effectively installing a “shadow chair” to influence near-term policy decisions. While this move would carry no formal authority, it signals Trump’s intent to realign the Fed’s stance toward more dovish monetary policy, particularly as economic headwinds intensify and tariffs begin to bite. Market participants interpreted this development as a clear signal of political pressure for rate cuts, boosting risk appetite across equities.
Supporting this view, fresh economic data released Thursday painted a picture of a softening economic backdrop. The final revision to Q1 GDP confirmed a contraction of 0.5% on an annualized basis, the sharpest decline in three years and worse than the prior estimate of a 0.2% drop. The contraction was driven by downward revisions to consumer spending and exports, with the goods trade deficit widening unexpectedly as exports fell further than anticipated, highlighting weakening external demand amid global trade friction and domestic policy uncertainty.
Despite the negative growth print, other components of the day’s economic data offered mixed signals. Initial jobless claims came in below forecasts, reaffirming the underlying strength in labor markets. Meanwhile, durable goods orders surprised to the upside, reflecting continued strength in capital investment—particularly in transportation equipment and industrial machinery. These indicators suggest that while overall growth is cooling, the economy has not yet tipped into broad-based recession and retains resilience in key sectors.
Equity performance was strong across most sectors. All S&P 500 sectors traded in positive territory except for real estate, which lagged due to concerns over interest rate volatility and compressed margins in the commercial property segment. Technology, consumer discretionary, and industrials led the advance, supported by dovish rate expectations and strength in cyclical stocks.
Among individual stocks, megacap tech names posted gains, continuing to drive index-level momentum. However, Apple underperformed, slipping 0.4% following a price target downgrade by JPMorgan Chase, which cited concerns about softer hardware sales in Asia and persistent margin pressures. Despite the dip, Apple remains near its 2025 highs and is still up strongly on the year.
Investor focus is now turning toward the July FOMC meeting, where the Fed is widely expected to hold rates steady. However, interest rate futures have shifted to price in a greater than 60% chance of a rate cut by September, reflecting the growing disconnect between slowing growth and still-tight monetary policy. Should further data corroborate economic weakness without a corresponding decline in inflation, the Fed may come under increasing pressure to ease before year-end, particularly if political influence becomes more overt.
In conclusion, Thursday’s gains reflect a market increasingly focused on the policy pivot narrative, with investors betting that weak GDP, trade pressures, and potential leadership changes at the Fed could usher in a more accommodative monetary stance. While headline data confirms that the US economy is slowing, underlying labor and investment trends suggest the downturn is not yet systemic. As earnings season approaches and inflation data remains mixed, equity markets are poised for volatility—but with a dovish Fed pivot now squarely in focus, risk assets continue to find support.
Sources
Bureau of Economic Analysis. (2025). GDP Third Estimate – Q1 2025. [https://www.bea.gov]
US Department of Labor. (2025). Initial Jobless Claims Report – June 2025.
US Census Bureau. (2025). Durable Goods Orders – May 2025.
Wall Street Journal. (2025). Trump Eyes Fed Shadow Chair Ahead of Nomination Cycle.
Bloomberg. (2025). Apple Dips on JPMorgan Price Cut Despite Broader Tech Gains.
CME FedWatch Tool. (2025). Rate Cut Probabilities – July and September FOMC Meetings.