The U.S. stock market saw another strong day, pushing the S&P 500’s weekly gains beyond $1.3 trillion, as investors continued to bet on Federal Reserve interest rate cuts. Both large-cap and small-cap stocks surged, driven by a wave of optimism that the central bank is poised to lower rates.
Almost all sectors of the U.S. equity market contributed to the rally, with tech giants and smaller companies outperforming the broader index. Meanwhile, Treasuries experienced slight losses as traders priced in higher chances of a 50-basis-point rate cut at the Fed’s upcoming meeting. A Wall Street Journal report suggested that policymakers are weighing cuts of either 25 or 50 basis points.
Economic data released this week further fueled these expectations. U.S. producer prices showed only a modest uptick in August, and revisions to July’s data were even lower than previously thought. Key categories that influence the Fed’s preferred inflation gauge remained muted. Additionally, jobless claims edged up, signaling a gradual cooling of the labor market.
“The economy isn’t crumbling, which gives the Fed time to lower rates,” said Brian Henderson, Chief Investment Officer at BOK Financial. “We expect the Fed to start fast with 25-basis-point cuts in September, November, and December, and then reduce the pace to one cut per quarter in 2025.”
The S&P 500 climbed 0.8%, with the Nasdaq 100 rising by 1.1% and the Dow Jones Industrial Average advancing 0.5%. Small caps, as represented by the Russell 2000, gained 1.6%. The “Magnificent Seven” tech stocks, including heavyweights like Apple and Microsoft, jumped 1.5%. Kroger Co. surged on positive growth expectations, while Micron Technology Inc. fell due to an analyst downgrade. Moderna Inc. took a hit after issuing a downbeat sales forecast.
Treasury yields on the 10-year note rose by three basis points to 3.69%. In Europe, German bunds snapped their winning streak after European Central Bank President Christine Lagarde reiterated the ECB’s commitment to keeping rates restrictive, following an anticipated 25-basis-point cut to 3.5%.
Oil prices climbed as Hurricane Francine disrupted crude production in the Gulf of Mexico, while gold soared to an all-time high, driven by inflation concerns and a flight to safe-haven assets.
Fawad Razaqzada, a market strategist at City Index, highlighted the importance of monitoring momentum after Wednesday’s tech-driven rally. “While we’ve seen some continuation to the upside, any signs of weakening could bring uncertainty back to the market,” Razaqzada said. “There’s a lack of clear bullish catalysts at this moment.”
Dan Wantrobski, a market strategist at Janney Montgomery Scott, warned that the volatile swings seen this week are likely to persist through September and October. “Given recent breadth, participation, and volume patterns, we are maintaining a defensive stance in the near term,” Wantrobski said, noting that such volatility is typical for this time of year.
Analysis: The Opportunities and Market Impact
For investors, this week’s rally is significant, with the stock market adding over $1.3 trillion to its value. The anticipation of multiple rate cuts by the Federal Reserve presents an opportunity for further gains in equities, especially in sectors that are highly sensitive to interest rates, such as technology and small-cap stocks. Lower borrowing costs are expected to boost corporate profits, which could further fuel the stock market rally.
On the other hand, rising Treasury yields and uncertain inflation trends suggest caution, as markets continue to grapple with potential risks such as an economic slowdown or unforeseen geopolitical tensions. Still, sectors like oil and gold could present additional opportunities for investors looking to hedge against volatility.
With the Fed signaling it may ease monetary policy, investors stand to profit from well-timed moves in growth stocks and tech giants. However, navigating the volatility expected over the coming months will require a careful balance of risk and reward.
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