Investors believe that the Fed will lower interest rates before the end of the September meeting. According to the data of CME Group's FedWatch Tool, as of Tuesday morning, the market expects a 100% chance of a rate cut in September, up from 70% a month ago.

Before the confidence increased, the inflation data in June was better than expected, while there were further signs of cooling in the labor market. Overall, economists and investors alike believe that these data mean that once the inflation rate falls to near the Fed's target of 2%, the Fed will start cutting interest rates soon.

Matthew Luzzetti, chief U.S. economist at Deutsche Bank, wrote in a research report on July 12th: "Recent data show continued weakness in the labor market and a sharp cooling of inflation pressures, particularly in all important housing categories."

The research report includes a forecast of a rate cut in September. "These developments are likely to have significant implications for the outlook for monetary policy."

Fed Chairman Powell said on Monday that recent data "to some extent" strengthened the Fed's confidence that inflation was falling towards the target level. However, the Fed chairman declined to specify what it meant for the Fed's interest rate timetable.

"I'm not going to signal any particular meeting," Powell said in an interview with the Washington Economic Club. "We're going to be looking at the data, we're going to be looking at the risks and the outlook and making our decisions as appropriate."

Given the recent series of improving inflation data and signs of a slowdown in the labor market, some on Wall Street have been calling on the Fed to start cutting interest rates before the impact on the U.S. economy causes the labor market to fall into chaos.

Jan Hatzius, chief economist at Goldman Sachs, argued in a new research report on Monday that there are "compelling reasons" for the Fed to start cutting interest rates at its July 31 meeting.

Hatzius wrote:"First, if the case for easing is clear, why wait another seven weeks to deliver the rate cut? Second, monthly inflation is volatile and there is always a risk of a temporary reacceleration, which could make a September cut harder to explain. The risks of waiting to cut rates clearly outweigh the risks of cutting rates now."

Hatzius also pointed out that although the Fed has promised to be separate from the upcoming election, a rate cut in July would avoid further speculation about the political motives behind its policy decisions. As of Tuesday morning, investors expect only a 7% chance of a rate cut in July, according to FedWatch Tool.

Regardless of whether a rate cut is possible in July, investors now believe that the future path of rates will be lower. Confidence in a rate cut coming has driven a broader rebound in the stock market.

As investors turn to industries outside of technology, the market sector that has been the most popular over the past year has underperformed.

The Roundhill Magnificent Seven ETF, which tracks the large tech stocks leading the 2023 stock market rally, has fallen more than 3% in the past five trading days. At the same time, the real estate and industrial sectors, which are sensitive to interest rates, are the market's biggest winners, with gains of about 5%.

The Russell 2000 small-cap index rose more than 10% and finally broke through its 2022 high in this bull market.

Callie Cox, chief market strategist at Ritholtz Wealth Management, said on Monday: "If this trading continues and the possibility of a rate cut later this year still exists, we may eventually see the bull market wake up, which is good news for all investors."

Edited by Jeffrey