To The Moon

$S&P 500(.SPX)$

After weeks of unease and sharp market swings, U.S. equities have started to show signs of stabilizing. Tech stocks, in particular, have once again pulled the major indices higher, with the Nasdaq and S&P 500 leading the rebound. Beneath the surface, however, a more consequential shift may be underway — a pivot in monetary policy that could redefine the trajectory of markets for the remainder of 2025.

Federal Reserve Governor Christopher Waller’s recent comments confirmed what many investors had speculated but few had expected so soon: the Fed is ready to cut rates. Not only that, but Waller suggested the process should begin in September, with multiple cuts possible over the following three to six months.

That signal alone would have been enough to jolt expectations. Yet, Wall Street’s largest banks are going further. Morgan Stanley now projects a 25 basis point cut this month, followed by similar cuts at every other meeting through the end of 2026 — a far more aggressive easing cycle than markets had priced in just weeks ago.

This sudden dovish pivot raises three pivotal questions for investors:

1. Has the recent pullback already ended?

2. Is the rebound a good time to consider covered call strategies?

3. Will Fed cuts this year exceed expectations, shocking markets?

Let’s unpack each in detail.

Market Recap: The Pullback That Shook Confidence

The late-summer pullback in U.S. equities was not entirely unexpected. September has historically been the most bearish month of the year for stocks. Since 1945, the S&P 500 has posted an average 0.7% decline in September, making it the only month with a consistent negative bias. Seasonality, combined with lingering inflation concerns and elevated bond yields, set the stage for turbulence.

In the weeks leading up to this rebound, the 10-year Treasury yield flirted with multi-month highs, weighing heavily on growth-oriented equities. The stronger-than-expected economic data initially suggested the Fed might stay restrictive longer, intensifying fears of a “higher for longer” policy stance.

Tech stocks, which had powered much of 2025’s rally, were hit particularly hard. The Nasdaq fell into correction territory, and leading names like Apple, Microsoft, and Nvidia gave back significant gains. Sentiment shifted quickly, with investors questioning whether the market had overheated in the first half of the year.

Yet, as often happens, extreme pessimism sowed the seeds of a rebound. Once the Fed’s messaging shifted, buyers rushed back in, particularly into sectors most sensitive to interest rates.

1. Has the Pullback Already Ended?

The rebound in the Nasdaq and S&P 500 suggests that the worst of the pullback may be behind us. However, investors need to examine both the technicals and fundamentals to determine whether this recovery is sustainable.

Technical Picture

From a technical perspective, the S&P 500 has bounced off key support levels, with strong buying emerging near its 100-day moving average. This is often a sign that institutional investors are defending positions. If the index can hold above that level through September, the argument for a durable bottom strengthens.

The Nasdaq, meanwhile, has reclaimed its 50-day moving average, another bullish signal. However, market breadth remains narrow — much of the upside is still concentrated in megacap technology firms. Without broader participation from cyclicals, industrials, and financials, the rebound could lack staying power.

Macro Fundamentals

The case for stabilization is stronger on the macro front. Inflation has continued to cool, with core PCE trending closer to the Fed’s 2% target. Meanwhile, growth data shows signs of softening without collapsing, a “Goldilocks” setup that justifies policy easing.

Historically, Fed pivots have been bullish for equities, particularly when they occur while the economy is still expanding. For example:

• In 1995, the Fed cut rates after inflation moderated, leading to a massive equity rally.

• In 2019, pre-pandemic rate cuts helped extend the longest bull market in U.S. history.

If 2025 proves similar — with inflation easing and growth stabilizing — the recent pullback may indeed have been nothing more than a temporary reset.

That said, the risk remains that the Fed is cutting not because inflation is conquered, but because growth is faltering faster than expected. If that’s the case, the market may not have fully priced in the downside.

2. Is the Recent Rebound a Good Time to Sell Covered Calls?

The rebound has left many investors wondering whether now is the right time to deploy income strategies like covered calls.

Why Covered Calls Look Attractive Now

1. Volatility Premiums Are Higher: The late-summer pullback pushed up implied volatility, which directly raises option premiums. This makes selling calls more lucrative.

2. Portfolio Recovery: Investors who saw their portfolios fall in August may now be back in profitable zones, allowing them to write calls at attractive strike prices.

3. Fed Policy Catalyst: With rate cuts looming, equities may grind higher but not necessarily surge in a straight line. This “sideways-to-up” environment is ideal for harvesting option premiums.

Risks to Consider

The main drawback of covered calls is that they cap upside potential. If the Fed delivers deeper cuts than expected and equities surge, investors who wrote calls may regret limiting their gains. This is particularly relevant for high-beta tech names, where sharp rallies can quickly blow through strike prices.

One compromise is to write calls slightly out-of-the-money, giving room for additional appreciation while still collecting premium. Another approach is to focus on less volatile holdings — dividend payers, REITs, or defensive stocks — where capping upside is less costly.

Historical Context

Historically, periods of Fed easing have been favorable for covered call strategies. For example, between 2001–2003 and 2019–2020, covered calls generated strong income as markets gradually digested lower rates while still facing volatility. The same dynamics may apply now.

3. Will the Fed’s Cuts This Year Exceed Expectations?

The most important question of all is whether the Fed’s actions this year will shock markets by exceeding expectations.

Waller’s Signal

Governor Waller’s call for immediate cuts was more dovish than anticipated. While he is not the lone voice on the committee, his comments are significant because they echo the growing view that maintaining restrictive rates risks overtightening.

Wall Street’s Forecasts

• Morgan Stanley projects a 25 bps cut this month and additional cuts at alternating meetings through 2026.

• Goldman Sachs is slightly less aggressive but still sees at least three cuts before mid-2026.

• Citigroup argues the Fed may need to move faster if labor market softening accelerates.

If Morgan Stanley’s baseline plays out, the Fed would deliver a far longer easing cycle than markets have priced in. Currently, futures imply only 75–100 bps of cuts over the next 12 months.

Market Shock Potential

The shock factor comes from the disconnect between what investors expect and what the Fed may actually do. If cuts are larger or come sooner, it could spark:

• A bond rally, with yields falling sharply.

• A growth-stock surge, as lower discount rates boost valuations.

• Pressure on the dollar, potentially fueling commodity rallies.

The flip side is equally important: if the Fed cuts aggressively, it may be because economic weakness is worse than advertised. That would raise recession risks and cap equity upside.

Strategic Takeaways for Investors

1. The Pullback May Be Ending, But Volatility Isn’t While the rebound looks encouraging, investors should not expect a straight line upward. Seasonal weakness, global uncertainties, and Fed-driven headlines will keep volatility high.

2. Covered Calls Are Compelling — If Used Selectively Income strategies make sense in this environment. Consider writing calls on positions where you are comfortable taking profits, or use them on defensive holdings. For high-growth tech, leave some upside room.

3. Fed Cuts Could Shock to the Upside If Morgan Stanley’s forecast proves correct, the Fed will deliver a far more aggressive easing cycle than priced in. This could be bullish for equities, but investors should watch whether the cuts are preemptive or reactive to deeper economic weakness.

Conclusion: A Market at a Crossroads

The U.S. market sits at a critical juncture. On one hand, the late-summer pullback appears to have set the stage for a rebound, with investors regaining confidence as the Fed signals an end to its tightening campaign. On the other, the depth and timing of future cuts could either supercharge equities or raise questions about the underlying strength of the economy.

For now, the message is clear: the Fed is pivoting, and markets are adjusting. Investors who remain nimble — using strategies like covered calls, diversifying across sectors, and keeping an eye on bond yields — will be best positioned to navigate what could be one of the most consequential policy shifts since 2019.

The next Fed meeting in September may not just deliver a rate cut. It may deliver a shock that redefines the second half of 2025.