Fed talks, tech gains and PCE inflation will test Wall Street this week

Wall Street will navigate a light run of headline drivers next week, but could still face a number of risks through the end of the third quarter as it looks to build on the gains from late September , fueled in part by Federal Reserve interest. tariff reductions.

The S&P 500, fresh off its best five-day gain of the year heading into last week’s Fed decision, extended its 2024 gain to about 20% through the final three months of the year. The benchmark is supported in part by a resilient economy, rising corporate profits and a new central bank outlook.

Megacap tech stocks, of course, are responsible for the bulk of the benchmark’s gains, but analysts are starting to see a consistent rotation into value and mid-cap stocks. The Russell 2000 has far outpaced gains for both the S&P 500 and the tech-focused Nasdaq over the past month.

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That rotation, tied to the Fed’s longer-term outlook, will be tested this week with key readings on consumer confidence, business activity and new home sales, all expected in the first three days of trading.

Data from Bank of America’s weekly “Flow Show” report suggests investors are still hoping to find market value in stocks. About $33.8 billion flowed into U.S. equity funds last week, the third-highest total of the year.

“As rate cut bets have fluctuated through 2024, solid earnings growth and a strong performance from more sectors have propelled the S&P 500 to new high after new high,” said Bret Kenwell , US investment analyst at eToro.

“As long as the economy holds up and inflation doesn’t come back to life, lower rates and strong earnings growth can continue to drive stocks higher over the long term.”

Micron’s earnings will highlight a quiet reporting week on Wall Street, with the chipmaker updating on its fiscal fourth quarter after the close of trading on Wednesday.

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Bigger headline risks heading into the end of the week include the Labor Department’s weekly jobless claims number — the final reading before its crucial September employment report on Oct. 4 — as well as the release of the Fed’s preferred inflation gauge, the price PCE. index, before the start of trading on Friday.

Before Thursday’s opening bell, the Commerce Department will also release its second revision of second-quarter GDP growth, which was last pegged at 3 percent.

Micron and Costco earnings on deck

In terms of earnings, chip maker Micron Technology (MU) will release its fourth-quarter fiscal report after the close of business on Wednesday. This release is expected to show key developments in memory chip pricing as well as a broader sense of the AI ​​investment theme heading into the final months of the year and beyond.

Citigroup analysts suggest about 80 percent of Micron investors are bullish on the report, adding that “buying expectations for November quarter guidance are in line with or slightly below our revised estimates of $8 billion in revenue and $1.24 in earnings per action”.

Micron shares have fallen more than 37% since the group reported disappointing third-quarter earnings on June 26.

Related: Stocks brace for big Fed hike after rethinking summer rate cut

Costco warehouse discounter (COST) Meanwhile, it will post quarterly earnings after the close of business on Thursday, just weeks after unveiling its first membership fee increase in more than seven years.

Costco’s outlook will be an important component in understanding the strength of consumer spending heading into the holiday season, with more details to come as third-quarter earnings season begins in mid-October.

LSEG data suggests S&P 500 collective profits for the three months ending in September are likely to rise 5.7 percent from a year earlier to an equity-weighted $512.7 billion.

This pace will accelerate significantly in the final months of the year, with LSEG data forecasting a 13.4% advance for collective earnings in the benchmark bluechip report.

Bond markets and the economic soft landing

Bond markets are also likely to be very focused this week after a curious post-Fed cut reaction that lifted 10-year note yields to 3.745% and 2-year notes north of 3.6%.

The Treasury will sell $183 billion in new coupon-bearing bonds this week, including an auction of $69 billion of 2-year notes on Tuesday.

Another key event this week, which will include more public remarks from Fed officials, will be an address by Chairman Jerome Powell ahead of the US Treasury Market Conference in New York before the start of trading on Thursday.

Last week’s half-point rate cut dropped the federal funds rate to between 4.75 percent and 5 percent. Powell’s remarks to the media after the decision suggested that while inflationary pressures will continue to ease through the end of the year, weakness in the labor market is beginning to develop in a way that — at least for now — could potentially hold back the economy surprisingly durable. .

Related: Fed offers big rate cut, signals focus on cooling labor market

Bank of America described the move as a “soft easing” that could support bets on a soft landing, easing inflation without a recession, for the world’s largest economy. The investment firm added that the S&P 500 rose about 10% in the first six months, following similar rate cuts in 1984, 1995 and 2019.

“If all goes according to plan, inflation numbers will continue to moderate before settling at the Fed’s target late next year or early 2026,” said Elizabeth Renter, senior economist at NerdWallet. “And hopefully without a significant economic downturn in the process.”

More economic analysis:

• Jobs reports surprise for higher Fed rate cuts
• Jobs reports on the timing and size of the Fed’s fall interest rate cuts
• Fed rate cuts may not guarantee a stock market rally in September

Mimi Duff, managing director at GenTrust, is a bit more skeptical, arguing that August’s spike in volatility, as well as the cooling labor market, should be closely monitored.

“We feel the markets are placing too high a probability of a perfect soft landing at this point,” she said. “We have placed a higher probability of a recession/slowdown in the next year than the markets, and this leads us to underweight our stocks.”

Related: Veteran fund manager sees world of pain coming for stocks