Markets Take a Breather After Rally; Fed Cut Likely Next Week

Stocks ended the week on a muted note after a strong rally, with the S&P 500 and Nasdaq hovering near record highs. Despite Friday’s mixed performance, all major indexes posted weekly gains as confidence in a September Fed rate cut solidified. A pullback in Treasuries lifted yields slightly, while mega-cap tech and IPO enthusiasm kept equities afloat. Consumer sentiment softened and long-term inflation expectations edged up, keeping rate cut expectations intact but slightly more nuanced.

Key Headlines & Market Movers

• Fed Cut All but Priced In Amid Softening Jobs Data: Markets are firmly expecting the Fed to cut rates next Wednesday, with odds favoring up to three cuts by year-end. Labor market cracks and weak consumer sentiment are outweighing sticky inflation concerns. TD Securities and BMO expect a dovish tone, though not overly committed to further cuts. Markets may react more to Powell’s press conference and dot plot shifts than the cut itself.
• Tech Leads Again, IPO Activity Signals Risk Appetite: Mega-cap tech stayed strong, with Tesla jumping 7% and Microsoft climbing nearly 2% after resolving OpenAI ownership issues. Adobe slipped slightly despite strong earnings. A $4B wave of IPOs, the busiest since 2021, signals robust investor demand. Most listings opened sharply above offer prices, although the market remains well below pre-pandemic IPO levels.
• Consumer Data Mixed, Inflation Unsettled: August data showed wholesale prices unexpectedly declined, but consumer inflation accelerated to its fastest pace since January. Long-term inflation expectations rose, while consumer sentiment hit a 4-month low. The market interpreted these as insufficient to derail Fed easing but a potential source of volatility if inflation pressures resurface.
• Bond Yields and Cash Flows Reflect Uncertainty: 10-year Treasury yields rose to 4.07% Friday, trimming the week’s bond rally. Despite expectations for lower rates, cash continues to attract inflows: $266B over four weeks, highlighting lingering caution. That said, investors may soon reallocate toward higher-yielding assets as returns on cash fall with future cuts.

S&P 500 Sector Performance

Looking Ahead

The spotlight is now squarely on next week’s Fed meeting. Markets expect a 25 bps cut and a dovish tone, but uncertainty remains around the path forward. If Powell signals hesitancy about further easing or the dot plot reveals fewer 2025 cuts, it could pause recent equity momentum. Still, with sentiment constructive and liquidity returning via IPOs and tech strength, equities may continue drifting higher in the near term barring surprises.