Wall Street Halts Rally as Fed-Cut Euphoria Fades

Ed Yardeni, Chief Investment Strategist at Yardeni Research, discusses the equity rally, Powell's Jackson Hole speech, and his S&P 500 target.

A rally that put stocks on the brink of all-time highs sputtered and bond yields rose as euphoria around Federal Reserve rate cuts eased ahead of a key inflation reading.

While Jerome Powell on Friday bolstered bets the Fed is ready to ease policy in September amid downside risks to the jobs market, doubts over the pace of those reductions lingered on Wall Street. In addition to officials remaining divided, traders are bracing for a not-so-friendly price reading Friday.

The Fed’s preferred measure of underlying inflation probably ticked higher last month, underscoring the challenge policymakers face in balancing rising prices and mounting risks in a fragile job market.

The personal consumption expenditures price index excluding food and energy rose 2.9% in July from a year ago. That would be fastest annual pace in five months.

“Jerome Powell’s ‘all clear’ signal for rate cuts turned a down week for stocks into a gain, but now the discussion will likely turn to how aggressive the Fed may be,” said Chris Larkin at E*Trade from Morgan Stanley. “Signs of a slowing labor market currently appear to be outweighing inflation concerns, but the Fed hasn’t abandoned its 2% target.”

The S&P 500 fell 0.2%. While most major groups slid, Nvidia Corp. paced gains in megacaps ahead of its results. The yield on 10-year Treasuries rose four basis points to 4.29%. The Bloomberg Dollar Spot Index wavered.

“We expect July core PCE accelerated due to supercore services, with only muted tariff passthrough into core goods,” said Oscar Munoz and Eli Nir at TD Securities. “Personal spending and income likely moved higher in July.”

Investors will also monitor comments from Fed officials at public events this week to gauge their appetite for a September rate cut. Governor Christopher Waller and regional Fed bank presidents John Williams, Lorie Logan and Tom Barkin are all scheduled to speak.

“We also look for Fedspeak this week to generally echo Powell’s view that the Fed can ease in September on shifting concerns towards the labor market,” the TD strategists said.

National Economic Council Director Kevin Hassett indicated President Donald Trump’s decision on who should succeed Powell is months away. His term as Fed chair is set to expire in May.

“I would expect that this would run out for another few months before the president decides,” Hassett said in a CNBC interview Monday. Treasury Secretary Scott Bessent is “running a thorough search process. There are a number of really excellent candidates being interviewed by him and the president.”

Separately, Hassett said it’s possible that the federal government will take further equity stakes in private-sector companies, after Trump’s recent deal on a nearly 10% share of Intel Corp. He described the Intel transaction as “like a down payment on a sovereign wealth fund, which many, many countries have.”

The next test for the stock market will be a read on what’s been driving gains for the past few years: artificial-intelligence euphoria.

Nvidia Corp. is set to report quarterly earnings on Wednesday after the market close, and traders are hoping it can soothe fears about AI spending and effectively confirm that the stock market’s latest rally isn’t just a technology bubble.

“Unless we get some sort of major UFO (UnForeseen Occurance), the most important development of this week will be the earnings report and guidance out of Nvidia,” said Matt Maley at Miller Tabak.

The odds that the giant chipmaker will report disappointing numbers - or give poor guidance - are extremely low, Maley said.

“However, we remember when they reported fabulous earnings and guidance in August of 2023…only to have the stock see a ‘sell the news’ reaction within a few days,” he noted.

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