The long-awaited rate cut from the Federal Reserve finally arrived this week, marking a significant shift in monetary policy after years of tightening. Investors initially celebrated the 50-basis-point cut with a wave of optimism, pushing stocks higher. However, the exuberance was short-lived as concerns about corporate earnings and slowing economic growth began to weigh on the markets.
Despite the turbulence, major indices still posted gains for the week. The S&P 500 finished up 1.4%, the Dow Jones Industrial Average added 1.6%, and the Nasdaq Composite gained 1.5%. Earlier in the week, the S&P 500 hit an all-time high, and the Dow closed at a record. Yet, Friday’s trading session brought the S&P down, highlighting the fragility of the current rally.
Upcoming Data to Test Powell’s Claims
The key question for investors in the coming days will be whether new economic data supports Fed Chair Jerome Powell’s assertion that the U.S. economy remains resilient. This week’s economic calendar is packed with pivotal reports, most notably the second-quarter GDP reading set to be released on Thursday. Analysts will also be closely watching the Friday release of the Personal Consumption Expenditures (PCE) index, the Fed’s preferred measure of inflation.
While Powell refrained from declaring victory over inflation, he expressed optimism that pricing pressures are easing. The PCE index is expected to show a year-over-year increase of 2.3%, down from 2.5% the previous month. This decrease would signal that the Fed’s aggressive monetary tightening over the past two years has begun to take effect, but the central bank’s long-term inflation target of 2% remains elusive.
Corporate Earnings and Economic Indicators in Focus
Corporate earnings reports will also drive market sentiment in the coming week, with Costco (COST), Micron (MU), and Accenture (ACN) among the key companies set to report quarterly results. Investors are eager to see whether these companies can meet expectations amid a more challenging economic backdrop.
As Powell noted, the risks to employment have increased even as inflation risks have diminished. The labor market, which has remained tight throughout much of the pandemic recovery, is now showing signs of cooling. Should this trend continue, it could create new challenges for the Fed as it balances its dual mandate of controlling inflation and maximizing employment.
Where Does the Fed Go From Here?
With the rate cut now in effect, the public can expect fresh commentary from Federal Reserve officials in the days ahead. At least eight officials, including Powell, Fed Vice Chair for Supervision Michael Barr, and New York Fed President John Williams, are scheduled to speak at conferences or offer remarks. These speeches will likely provide more insights into the Fed’s decision-making process and the future of monetary policy.
The Fed has indicated that two more 25-basis-point rate cuts are likely by the end of the year, with further cuts planned for 2025. Powell has pushed back against the notion that the central bank is playing catch-up, emphasizing that the 50-basis-point cut should not be viewed as a new standard. However, critics argue that the Fed should have eased rates sooner, and some analysts fear that a more aggressive easing cycle could make it harder to achieve the 2% inflation target.
Tech Stocks Get a Boost—But for How Long?
The Fed’s rate cut has provided a welcome boost to tech stocks, a sector that has been searching for its next catalyst. All but one of the so-called “Magnificent Seven” stocks—Meta (META), Apple (AAPL), Alphabet (GOOG, GOOGL), Amazon (AMZN), Microsoft (MSFT), and Tesla (TSLA)—posted gains last week, outpacing the broader market. Nvidia (NVDA), the lone laggard, shed over 2% as it faced volatility following a strong run earlier in the year.
Tech investors are hopeful that lower interest rates will reignite growth in the sector, particularly after a mixed earnings season that saw Wall Street sour on massive AI spending. However, some analysts caution that the upside for tech stocks may be limited. Citi’s head of U.S. equity strategy, Scott Chronert, warned that as growth in these companies becomes harder to sustain, even the most high-flying stocks could face challenges.
The Path Ahead for Investors
As the Fed embarks on a new chapter of monetary easing, investors are left with a host of unanswered questions. Will the labor market continue to weaken? Can inflation be tamed without triggering a recession? And how will corporate earnings fare in an environment of slowing economic growth?
With more data and Fed commentary on the horizon, the answers to these questions will likely shape the market’s direction in the weeks ahead. Investors will need to stay vigilant, balancing optimism about rate cuts with caution about the challenges that lie ahead.
By Orlando J. Gutiérrez