Stocks reached new heights for another week as investors speculated on an impending interest rate cut by the Federal Reserve, anticipated to be announced next week. The central bank is expected to prioritize a cooling labor market, despite ongoing inflationary pressures complicating the scenario. Current market sentiment indicates overwhelming confidence in a quarter-point reduction, with futures markets showing a probability of over 90%, according to the CME FedWatch tool.
This upcoming week is poised to be pivotal for the markets, as the Fed’s decision could influence the trajectory of the current stock rally. On Friday, the three major indexes ended the day mixed but maintained solid weekly gains. The Dow Jones Industrial Average marked nearly a 1% increase, snapping a two-week losing streak. Meanwhile, the S&P 500 and tech-centric Nasdaq Composite recorded their best weekly performances since early August. Treasury yields lingered near recent lows, and gold prices surged to new records as anticipation for a Fed pivot heightened.
In addition to the Fed’s decision, the economic calendar is set to provide updates on jobless claims and manufacturing data, which will offer additional insights into the economy’s strength. Attention will also be directed towards mortgage rates, which dropped significantly this week, with the average 30-year fixed mortgage rate falling to 6.35% from 6.5%, according to Freddie Mac.
While earnings season is drawing to a close, several key players remain, including FedEx, whose results are often seen as indicators of global trade and the overall health of the U.S. economy. Other companies reporting include homebuilder Lennar, food giant General Mills, restaurant operator Darden, and Cracker Barrel, which has recently gained attention due to its rebranding efforts.
The Fed’s forthcoming interest rate decision and Chair Jerome Powell’s subsequent press conference will be the week’s focal economic events. Alongside its rate announcement, the Fed will release its quarterly “dot plot,” reflecting policymakers’ projections for future interest rates. In June, officials had predicted two rate cuts for 2025, though the released forecasts revealed a divided committee—a stark contrast to earlier expectations, with seven members advocating for no cuts at all.
Investors are eagerly seeking clarity; however, the current landscape is fraught with challenges. Surging tariffs have increasingly contributed to inflation, evidenced by U.S. customs duties reaching a record $29.5 billion in August due to President Trump’s latest “reciprocal” levies. The Consumer Price Index (CPI) for August highlighted persistent inflationary pressures across diverse sectors, such as food, vehicles, and household goods, with significant increases in prices for coffee, beef, and produce. Services inflation remains elevated, reflecting a nearly 6% rise in airline fares.
Job market conditions have also raised concerns, with jobless claims reaching their highest levels in nearly four years. Payroll growth was limited to just 22,000 in August, with government revisions indicating that nearly 1 million fewer jobs were created in the previous 12 months than initially reported. This combination of sticky inflation and growing labor market weaknesses presents a nuanced dilemma for Powell: whether to proceed cautiously with rate cuts to prevent a deeper downturn or to act swiftly and risk reigniting inflation.
The caution observed among everyday investors contrasts with Wall Street’s optimistic perspective. AAII’s survey revealed only 28% of investors identifying as bullish, while nearly half were bearish. In contrast, prominent strategists from Deutsche Bank, Wells Fargo, Barclays, and Yardeni Research have raised their S&P 500 targets, pointing to resilient earnings and a robust investment cycle in artificial intelligence as critical factors supporting the market’s ascent.
Deutsche Bank has increased its 2025 forecast to 7,000—signaling the most optimistic stance among recent upgrades. Meanwhile, Wells Fargo expects 6,650 for year-end, potentially climbing to 7,200 by 2026. Barclays raised its 2025 outlook to 6,450, while Yardeni boosted its target to 6,800, assigning a notable probability to a “melt-up” scenario reaching 7,000 by December.
Despite the positive outlook, the fragile interplay of inflation, weakening job data, and high market valuations has heightened scrutiny of the rally’s sustainability, particularly its dependency on a narrow range of leading tech stocks. Concerns of “froth” in the market have been acknowledged by Wells Fargo, yet they remain confident that the bull run can persist as long as capital investment in AI remains strong. Barclays’ strategist Venu Krishna echoed these sentiments, suggesting that fears of AI disruption in software are exaggerated.
A notable highlight this week was Oracle’s stock, which surged over 30% after the company projected that its AI-powered cloud revenue could reach $144 billion by fiscal 2030. This underscored Wall Street’s belief that artificial intelligence continues to define the investment landscape. As one Wells Fargo strategist aptly put it, “The music stops when AI capex stops. Enjoy the party.”
As the week progresses, economic data and earnings reports will be critical in shaping market perspectives, with expectations for various key metrics, including retail sales and initial jobless claims. Attention will also be directed towards ongoing developments in the housing market and broader economic conditions, as stakeholders prepare for and react to the anticipated Fed decisions.
