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 confidence is restored, June inflation data is better than expected, while there are signs of further cooling in the labor market. Overall, economists and investors alike believe that these data indicate that once inflation rates approach the Fed's target of 2%, the Fed will soon begin to cut interest rates.

In a July 12 research report, Deutsche Bank's chief US economist Matthew Luzzetti wrote, "Recent data has shown that the labor market remains weak and inflation pressures have cooled notably, particularly across all major housing categories."

The report includes a forecast for 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 has "somewhat" increased the Fed's confidence that inflation is falling to its target level. However, the Fed Chairman declined to specify exactly what this meant for the Fed's interest rate schedule.

"I'm not going to signal any particular meeting," Powell said in an interview with the Washington Economic Club, "We'll meet, as we always do, and make those decisions based on the evolving data and risks."

Given the recent series of improving inflation data, and signs of a slowdown in the labor market, some on Wall Street have been calling for the Fed to start cutting rates before its impact on the US economy sends the labor market into turmoil.

Goldman Sachs chief economist Jan Hatzius said in a new research report on Monday that there were good reasons for the Fed to start cutting interest rates on its next meeting on July 31.

Hatzius wrote: "First, if the reason for cutting interest rates is clear, why wait another seven weeks to take action?" "Second, monthly inflation is volatile and there is always a risk of temporary re-acceleration, which could make a rate cut in September difficult to explain. From July, this risk can be avoided."

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

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

As investors turn to industries outside of technology, the most popular market area in the past year has performed poorly.

Roundhill Magnificent Seven ETF, which tracks large technology stocks leading the 2023 stock market rally, has fallen more than 3% in the past five trading days. Meanwhile, real estate and industrial, the two interest rate-sensitive industries, have been the market's biggest winners during the same period, rising by about 5%.

The small-cap Russell 2000 index rose more than 10%, finally surpassing its 2022 highs in this round of bull market.

Ritholtz Wealth Management's chief market strategist, Callie Cox, said on Monday, "If this trade continues and the likelihood of a fall in interest rates in the fall remains, we may eventually see the bull market wake up, which is good news for all investors."

Edited by Jeffrey