By Jack Kraft, CFA, Investment Strategist
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U.S. equities finished the week higher as investor sentiment was boosted by loosening central bank policy. Risk assets have a supportive backdrop as economic growth remains strong coupled with the Federal Reserve (Fed) cutting the federal funds interest rate by 50 basis points on September 18. The S&P 500 posted its fifth positive week in the last six, ending the week up 1.4%. Meanwhile, the tech-heavy Nasdaq Composite rose 1.5%, while the Dow added 1.6%. Treasuries mostly had priced in the move in rates prior to the Fed meeting, with the 10-year yield higher by about 8 basis points on the week. Commodities also participated in the rally as crude oil rose 4%, while gold broke above $2,600/ounce.
The Fed made the bold decision to go big and front-load rate cuts as it reduced the fed funds rate by 50 basis points amid concerns it is falling behind the curve. The central bank is trying to engineer a soft landing for the economy as the Fed shifts its focus from inflation risks to employment risks following data suggesting a softening of the labor market. Monthly payroll growth has slowed to roughly 140,000 in August from 250,000 at the start of the year. Wage growth has also slowed to 3.9% from a peak of 6% in 2022, according to Goldman Sachs. Lower wage growth should help the inflation narrative as there will be less pressure to pass these costs on to consumers. Additionally, the slowdown in wage pressures and a more rebalanced labor market should bode well for corporate profit margins. At the moment, the Fed is anticipated to make two additional quarter-point reductions this year, with more rate cuts in 2025, before ultimately reaching its terminal rate in 2026.
Lower rates should offer some much-needed support to the housing market as consumers begin to refinance higher mortgage rates. The MBA Refinance Index staged its largest one-week advance since March 2022 as 30-year mortgage rates fell to 6.0% from a peak of 7.8% last fall. The housing market seems to be bifurcated as existing home sales look sluggish, falling to a 10-month low in August. Meanwhile, demand for new homes remain robust with housing starts coming in above expectations and rising 9.6% in August.
Stock leadership has also looked healthier as the market has begun pricing in the Fed rate-cutting cycle. A broadening out of gains has taken place as investors begin to rotate out of the Magnificent Seven and into high-quality, dividend-paying stocks. Value has outperformed growth in the third quarter with the Russell 1000 Value beating the Russell 1000 Growth by more than 6% since July. Additionally, the equal-weight S&P 500 is up more than 8.0% quarter-to-date. Defensive sectors such as utilities, real estate and financial have all seen sharp gains, while the beloved Magnificent Seven, as an average, is up less than 1.0% this quarter.
The broadening out of gains has also pushed equity valuations for large-cap securities upward as the S&P 500 trades at 21.6 times forward price to earnings (P/E). The S&P 500 broke through the 5,700-level last week and is now up more than 20% year-to-date. This follows a 2023 gain of 26.3% for the large-cap index. Returns have been more than robust for the past two years and investors have been rewarded for staying invested. In the short-term, earnings may need to catch up to valuations, but investors should remember to not “fight the Fed.” I wouldn’t be surprised if we see fatter and flatter returns going forward for the S&P 500. For example, upside may be limited by starting valuations, but look for opportunities to add risk on drawdowns because the backdrop of positive earnings growth, positive U.S. GDP and looser monetary policy should be supportive of a risk-on narrative for 2025. Furthermore, opportunities outside of large-cap stocks should not be ignored. The S&P 400, which measure mid-cap equities, trades at a much more reasonable 15 times forward earnings, while the Euro STOXX 600 is trading at 14 times forward earnings.
In the week ahead, investors should have a relatively quiet week as economic data will garner much of the attention. On Monday, investors will receive preliminary updates on September manufacturing and services Purchasing Managers’ Index (PMI). Headlining the calendar will be the release of the Personal Consumption Expenditures (PCE) Price Index on Friday, which is the Fed’s preferred measure of inflation. Consumer sentiment and personal income data will also hit the tape Friday. Elsewhere, investors will get some real estate updates with pending and new home sales as well as an update from the S&P Case-Shiller home price index. A few earnings reports will be notable, with AutoZone on Tuesday, Cintas and Micron on Wednesday, and Costco and Accenture on Thursday. In central bank news, Fed presidents, governors and Chairman Jerome Powell will be giving a slew of speeches in which investors will be looking for hints on the state of the economy and rate-cutting cycle.
This Week’s Major U.S. Economic Reports & Fed Speakers
| Time (ET) | Report |
Period |
Median Forecast |
Previous |
| MON, SEPT. 23 | ||||
| 8:00 AM | Atlanta Fed President Raphael Bostic speaks | |||
| 9:45 AM | S&P flash U.S. services PMI |
Sept. |
55.4 |
55.7 |
| 9:45 AM | S&P flash U.S. manufacturing PMI |
Sept. |
48.4 |
47.9 |
| 10:15 AM | Chicago Fed President Austan Goolsbee speaks | |||
| 1:00 PM | Minneapolis Fed President Neel Kashkari speaks | |||
| TUES, SEPT. 24 | ||||
| 9:00 AM | S&P Case-Shiller home price index (20 cities) |
July |
— |
6.50% |
| 10:00 AM | Consumer confidence |
Sept. |
102.8 |
103.3 |
| WED, SEPT. 25 | ||||
| 10:00 AM | New home sales |
Aug. |
700,000 |
739,000 |
| 4:00 PM | Federal Reserve Governor Adriana Kugler speaks | |||
| THUR, SEPT. 26 | ||||
| 8:30 AM | Initial jobless claims |
Sept. 21 |
223,000 |
219,000 |
| 8:30 AM | Durable-goods orders |
Aug. |
-3% |
9.80% |
| 8:30 AM | GDP (second revision) |
Q2 |
2.90% |
3.00% |
| 9:20 AM | Federal Reserve Chair Jerome Powell gives opening remarks |
|
||
| 9:25 AM | New York Fed President John Williams speaks | |||
| 10:00 AM | Pending home sales |
Aug. |
1% |
-5.50% |
| FRI, SEPT. 27 | ||||
| 8:30 AM | Personal income |
Aug. |
0.40% |
0.30% |
| 8:30 AM | Personal spending |
Aug. |
0.30% |
0.50% |
| 8:30 AM | PCE index |
Aug. |
0.10% |
0.20% |
| 8:30 AM | PCE (year-over-year) |
2.20% |
2.50% |
|
| 8:30 AM | Core PCE index |
Aug. |
0.20% |
0.20% |
| 8:30 AM | Core PCE (year-over-year) |
2.70% |
2.60% |
|
| 10:00 AM | Consumer sentiment (final) |
Sept. |
69.2 |
69 |
| 1:15 PM | Federal Reserve Governor Michelle Bowman speaks |
Links to previously published commentaries can be found at benjaminfedwards.com/Latest Investment Insights/Market Commentary/Market