As investors positioned themselves ahead of a crucial Federal Reserve update and cheered for lower inflation, the U.S. stock market ended another strong week, with major indexes continuing their summer rally.
The Russell 2000 small-cap index outperformed its larger counterparts with a gain of more than 3% for the week, while the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite all set new records in recent sessions.
Cooling Inflation Encourages Hope
The most recent Consumer Price Index (CPI) data, which showed inflation increasing 2.7% year over year in July—a little less than anticipated—boosted markets. This bolstered expectations that the Fed would cut interest rates for the first time as early as September.
One strategist stated, “The Fed finally has cover to ease policy with inflation trending in the right direction.” “A near-certain rate cut next month has already been priced in by the market.” The probability is currently estimated to be between 85 and 90 percent.
Powell is the center of attention at Jackson Hole.
The Fed Chair Jerome Powell’s eagerly awaited speech at the Jackson Hole Symposium later this week will be the next significant test for investors. In order to determine the pace of upcoming rate cuts, traders will be analyzing every word.
Analysts observe, “Powell knows the economy could use some relief, but he doesn’t want to risk reigniting inflation.” “His ability to strike a balance in Jackson Hole will be crucial.”
Watch Sector Changes & Earnings
The market did not experience last week’s rally equally. After a dazzling run earlier this year, semiconductors and AI leaders cooled, while biotech, homebuilders, and financials stocks saw strong buying.
The focus now shifts to retail earnings, with Walmart, Home Depot, Target, and Lowe’s set to report in the coming days. As the fall shopping season approaches, their findings ought to give insight into consumer health.
Bears vs. Bulls: Conflicting Storylines
Overall, Wall Street sentiment is still bullish. Rick Rieder of BlackRock recently referred to this as “possibly the most bullish investing environment ever,” pointing to record share buybacks, robust earnings, and trillions of dollars in cash sitting on the sidelines.
However, not everyone is persuaded. Goldman Sachs has warned that the so-called “Goldilocks” setup—where growth is solid and inflation is falling—could prove fragile. Meanwhile, some analysts point to elevated price-to-earnings ratios near 30, levels last seen before the dot-com bust, as a reason for caution.
The U.S. stock market is soaring due to expectations of Fed rate cuts and declining inflation. However, investors are preparing for a crucial week as economic risks persist and valuations are stretched. Powell’s comments at Jackson Hole and the impending retail earnings could determine whether the rally continues or eventually pauses.