Weekly Preactions: Dow Jones, Nasdaq, S&P 500: FOMC Ahead
As investors await the impending Federal Reserve meeting, stocks increased on Friday, with the S&P 500 and Nasdaq Composite recording their best weekly performance of 2024.
The S&P 500 closed at 5,626.02, barely below its record high set in July, after rising by 0.54%. With a heavy weighting in technology stocks, the Nasdaq Composite saw a 0.65% advance and closed at 17,683.98. For the fifth day in a row, both indices saw rises. In the meantime, the Dow Jones Industrial Average closed at 41,393.78, up 297.01 points, or 0.72%.
Following a stretch of underperformance in the sector, investors’ continued strong interest in mega-cap tech and semiconductor stocks helped fuel this week’s rise.
The week saw the biggest weekly increases of the year for both indices, with the S&P 500 rising 4% and the Nasdaq rising 5.9%. Throughout the same time frame, the Dow increased by 2.6%.
Preview of FOMC: What economists anticipate
All eyes will be on the Federal Reserve’s policy meeting, which is scheduled for September 17–18. It is widely anticipated that the Fed will decrease interest rates by 25 basis points at this meeting. The current target rate set by the Fed is in the range of 5.25% to 5.5%.
On Wall Street, analysts are still split on how much of a drop the initial rate will be.
Powell and his staff, according to JPMorgan employees, ought to recalculate the policy rate by 50 basis points (bp) “to adjust for the shifting balance of risks.”
They continued, “What the FOMC will do is less clear, but we’re sticking with our call that they will cut 50bp and do the “correct” thing.”
According to JPMorgan, the median dot for this year will be 100 basis points lower than the current rate of 5.375%, indicating two more 25 basis point reductions in the year’s last two meetings.
They anticipate that the median dot will show an additional 150 basis points of rate decreases in the upcoming year. The longer-run rate of 2.75% to 3% is anticipated to be maintained in the predictions for 2026 and 2027. Economists point out that the median dot for this year would probably only indicate 75 basis points of easing if the Fed chooses to take a more cautious stance and reduces by 25 basis points the next week.
Economists predict Powell will upbeatly state that they are maintaining the gentle landing with a 50 basis point drop. “We would anticipate his tone to reflect a willingness to quickly pick up the pace on any additional indications of the labor market softening, with a 25bp ease.”
The “most likely” option, according to Nomura economists, is a 25 basis point rate decrease at the next meeting, followed by another 50 basis points of cuts the following year.
This week’s important economic events include the FOMC meeting as well as the reports on industrial output and retail sales on Tuesday and Thursday, respectively, which are the first jobless claims data to be released.
The opinions of analysts about US stocks
Evercore ISI: “Whatever the Fed decides will cause volatility up, down, or both ways in stocks – You can’t split the difference if market pricing remains uncertain into Wednesday.”
Another unidentified and possible pressure factor is the market response in USDJPY, whose Yen strength in August in reaction to the BoJ rise and poorer U.S. economy was a direct cause of the historic 8/5 VIX Spike. Contrary to expectations, a 25bp cut might have the opposite impact and cause the USDJPY strength to fall below the crucial 140 level, which would be a headwind for stocks. This is because stress can cause the USDJPY to weaken.
Citi: “We continue to believe that the policy programs of both candidates will negatively impact US equity, particularly in a “sweep” scenario. In comparison to the Trump platform (0% to -4%), we rank the Harris platform as progressively more negative (-4% to -6%). The main reason for this is that a Harris result directly implies higher business tax rates. The majority of the short-term danger to fair values is reduced in a divided congress with either candidate.
Goldman Sachs: “The rate of rate cuts is not as significant a driver of stocks as the trajectory of growth is.” Limited room for P/E expansion is implied by the counterbalancing valuation impact of rising bond yields and improved growth projections. Multiples being flat means that EPS growth will drive the S&P 500 slightly higher. Our 2024 S&P 500 price target of $5,600 is still our goal. We have set rolled 6- and 12-month price goals of 5700 and 6000, respectively.
Important Information: “Resilient domestic growth, disinflation, monetary easing, and strong earnings are among the fundamental news themes that continue to support equities.” Overvalued stock prices are the primary challenge for equities. In summary, the general majority predicts that the SPX will remain erratic and not reach new highs (at least not until after the election). However, if the fundamental news flow continues along its current track, the index may very well break out higher before November 5.
Wedbush: “As the Fed and Powell begin their rate-cutting cycle this week, we believe the stage is set for tech stocks to move higher into year-end and 2025. Macrosoft landing remains the path, and tech spending on AI remains a generational spending cycle just starting to hit the shores of the tech sector.”
