Federal Reserve Chair Jerome Powell spoke at the ECB Forum on Central Banking in Portugal on Tuesday. Despite acknowledging a disinflationary trend, he reiterated that the Fed will require more evidence before making interest rate cuts.

NewEdge Wealth chief investment officer Cameron Dawson joins Catalysts to give insight into Powell’s comments, where the market stands, and what investors need to keep in mind moving forward.

“Growth has outperformed value by 16% this year. We think you can explain a lot of that outperformance because of earnings revisions. Earnings for the growth index are up 11% over the last year, whereas for value they’re down 4 percent. And it’s good to remember that in a rising EPS revision environment, you tend to see more multiple expansion, which has allowed growth stocks to now trade at an 80% premium to value, which is back to the highs it got to back in 2021,” Dawson tells Yahoo Finance.

For more expert insight and the latest market action, click here to watch this full episode of Catalysts.

This post was written by Nicholas Jacobino

Video Transcript

For more on Chairman Powell’s comments, we’re gonna bring in Cameron Dawson, New Wealth Chief Investment Officer, Cameron.

It’s always great to speak with you.

Thanks for being here with us.

I want to pull up a specific quote from Fed chair Jay Powell because he recently said in these comments that in a year, us inflation will be in the mid to low to that’s obviously been the Feds rallying cry throughout this rate hike cycle.

What do you think is giving him confidence on that?

Yeah.

Well, they’ve had this confidence at different points over the last let’s call it a year or so that inflation would be firmly on their target and then it seems to go in the other direction.

So it does seem to be that there could be risks to the upside if we think of things like potential immigration reform, tariffs as well as some of the things we’re seeing within supply chains.

So it is interesting that they’re striking this note of confidence.

Again, we think the thing that would get them to cut rates much more than just accelerating inflation would be more deterioration in the labor market.

And that’s why we’re watching Friday’s job data so much is that if you look at unemployment, it’s sitting at 4.0% that’s effectively where the FED is projecting it to be for the full year.

If we see an further increase in that unemployment rate, we do think that that opens the door up for the rate cuts and really regardless of what the inflation path is at that time, I also want to talk to you about your latest uh note here about GDP.

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Uh We are seeing our first cut to 24 GDP in a year here.

Uh We are also seeing the Atlanta Fed GDP.

Now, figures moving down to 1.7% from 2.2%.

To what extent is that the start of the type of crack that guests who have come on our show for the last couple of years have been saying we really need to be looking out for.

It is a sea change from the last year or so.

Meaning that if you go back over the last 18 months, we have had this rising environment for GDP forecasts.

Seems like each and every month they get notched higher.

This is the first time in 12 months that 2024 GDP estimates have been cut and we’ve been expecting it simply because economic surprises have turned deeply negative.

You see that deterioration in the Atlanta Fed GDP now, which all suggests that maybe forecasts were a little bit too high.

Now, this is not necessarily saying that you’re slipping into some kind of deep recession.

But just to say that the environment for further increases to forecasts is likely behind us, we likely have to moderate forecasts lower.

And then that raises the question of what do growth and risk assets do in that environment because they really have enjoyed this environment of rising forecasts.

Well, speaking of surprises here, we are seeing some movement in the Treasury space, particularly at the end of last week, we saw Treasury potentially the the kind of commentary was that they were repricing and starting to price in rather a potential Trump presidency.

To what extent do you see the bond market may be starting to take some action on positioning ahead of the November election that the equities market might want to start paying attention to?

Yeah, I think we learned two things from the debate last week.

The first one being that neither party is making austerity a key priority for their policies, which just means that we have to get used to continued high budget deficits regardless of who wins.

But then if we look at the polling coming out of it, the odds of a Trump victory as well as a Republican sweep went up materially.

So the question would be for the on market is do Trump’s policies potentially contribute to inflation?

And that’s where we get back to things like immigration as well as tariffs and ask the question of could they contribute to higher inflation readings into 2025?

This would be a surprise for the fed.

It would be a surprise for the bond market because nowhere is anybody pricing in a re acceleration in inflation because of these kinds of policies?

Cameron I want to end by talking about your latest note that you sent over to us here looking at value versus growth stocks and uh not super surprising growth.

The huge winner of those two, talk to me about your thinking on how investors should be planning around the longevity of that.

How long are we going to continue to see growth?

K here, it’s such a good question because we have seen growth be absolutely dominant after a really strong 2023 growth has outperformed value by 16% this year.

We think you can explain a lot of that out performance because of earnings revisions, earnings for the growth index are up 11% over the last year.

Whereas for value, they’re down 4%.

And it’s good to remember that in a rising eps revision environment, you tend to see more multiple expansion which has allowed growth stocks to now trade at an 80% premium to value, which is back to the highs, it got to back in 2021.

So we do say that trees don’t grow the sky and there is going to come a point where you will see a leadership rotation, but we think you need a catalyst and we think that catalyst is earnings, meaning that you have to see either growth earnings moderate or value earnings start to turn higher in order for a sustained leadership rotation to happen.

Well, we love talking about those catalysts on our show here, Cameron.

Thank you so much for joining us this morning.

We really appreciate it.

That was Cameron Dawson, New Edge Wealth’s Chief Investment Officer.