By Linh Tran, Market Analyst at XS.com
After a slight adjustment of 0.05% on Friday last week, the S&P 500 regained momentum with a 0.47% increase at the start of this week. The driver came from the technology–communication sector as expectations for a 25 bps Fed rate cut at the September 18 meeting were maintained. However, capital flows remained selective, with energy and financials still fluctuating in line with yields and oil prices.
Last week’s macroeconomic data continued to deliver mixed signals. CPI m/m rose 0.4% (above the forecast of 0.3% and the previous 0.2%), pushing CPI y/y up to 2.9% (from 2.7%), implying that consumer inflation remains sticky. On the other hand, PPI m/m fell 0.1%, suggesting input cost pressures have eased, providing room for margins if companies can maintain pricing. Meanwhile, Retail Sales were mixed: the core figure exceeded expectations while the headline was weaker, indicating consumption remains resilient but uneven. The Michigan Consumer Sentiment Index dropped sharply to 55.4, well below forecasts, while jobless claims came in at 245k (better than the 263k expected), showing that the labor market remains solid.
This combination of data further reinforced expectations that the Fed will cut rates by 25 bps at the September 18 meeting, but also highlighted the risk of persistent inflation, which may result in a more cautious message.
For U.S. equities, the interest rate outlook is just as important as the size of the cut at the upcoming meeting. A 25 bps cut accompanied by a message suggesting a consistent easing cycle would lower discount rates, supporting P/E valuations and duration-sensitive sectors such as technology, communications, and software. Conversely, a cut with a “data-dependent”/hawkish tone (especially if suggesting slower and limited cuts) would keep real yields elevated, limiting valuation expansion and leaving the S&P 500 in a sideways range with weak market breadth.
At the corporate fundamentals level, inflation dynamics are producing opposing forces: lower PPI benefits input costs and gross margins, but higher CPI implies persistent wage/service cost pressures and limited ability to raise selling prices. On consumption, the positive factor lies in a still-strong labor market (supporting defensive revenues and core retail), while cyclical sectors (industrials, materials) remain challenged by funding costs and weak external demand.
An easing scenario typically favors growth sectors (technology, communications, IT services) and long-duration cash flow models. Financials depend on the yield curve: rate cuts could improve net interest margins if the curve steepens, but prolonged high real yields constrain valuations. Energy remains sensitive to oil volatility—geopolitical risks (Russia–NATO drone incidents; Middle East tensions) may trigger short-term oil spikes, but global demand and the industrial cycle will ultimately determine sustainability.
Geopolitics is now an unavoidable variable. Russian drones violating NATO airspace and Middle East tensions following Israeli strikes in Qatar maintain a high level of uncertainty. For equities, this often sparks localized risk-off phases, widening spreads between defensive and cyclical sectors, while boosting demand for safe-haven assets. With the Fed about to decide policy, geopolitical shocks could amplify short-term volatility in the US500.
Overall, in the near term, the S&P 500 depends heavily on the rate decision and policy guidance from the Fed. Possible scenarios include:
Clearly dovish: a 25 bps cut with explicitly dovish signals could give the S&P 500 the opportunity to resume an upward trend.
Cautious easing: a cut with a “wait for data” message, without committing to an easing path, may leave the index range-bound, requiring more positive data signals (especially core inflation cooling) as a catalyst.
Hawkish surprise/no cut: could push the USD higher. This would pose significant downside risks for equities, with greater pressure on cyclical and rate-sensitive stocks. However, this scenario is considered very unlikely.
In short, the near-term outlook for the S&P 500 remains cautiously positive. However, confirmation from the Fed regarding the easing trajectory is required. Until such signals emerge, the base case remains cautious, with internal rotation between tech leadership and defensive support.