S&P 500 set for longest losing streak in a month

As a result, the S&P 500’s 12-month forward price-to-earnings ratio recently touched a high of 22.9, a level that this century was exceeded in just two prior instances: the dot-com bust and the pandemic rally in the summer of 2020 when the Fed reduced rates to near zero.

While the central bank’s focus has tilted toward the jobs market, traders will be closely watching Friday’s inflation report.

“Active investors will want to see an in-line or lower inflation result, keeping the Fed on pace for two more rate cuts in 2025,” said Bret Kenwell at eToro. “As much as investors want lower rates, a solid economy is more important.”

The S&P 500 hovered near 6,600, down for a third straight day. The yield on 10-year Treasuries advanced four basis points to 4.18%. The dollar rose. Bitcoin sank.

Inflation-adjusted GDP, which measures the value of goods and services produced in the US, increased at a revised 3.8% annualized pace. That was stronger than the previously reported 3.3% advance and followed an outright contraction in the first quarter.

To Paul Stanley at Granite Bay Wealth Management, another aspect is that Thursday’s GDP strength likely doesn’t change the Fed’s expected path of rate cuts, “since the data is backward looking.”

In fact, money markets only slightly reduced bets on rate cuts after the data, projecting about 40 basis points of Fed reductions before the year is over.

The decline in initial jobless claims to the lowest since July points to a labor market that — while cooling — has seen relatively limited layoffs. Most companies are choosing to hold onto workers even as lingering economic uncertainty keeps a lid on hiring.

“There may be cracks in the labor market, but if today’s data is any indication, they haven’t widened recently,” said Chris Larkin at E*Trade from Morgan Stanley. “Along with an upward revision to GDP, we’re seeing an economy that remains resilient despite an array of challenges.”

Fed Governor Stephen Miran said the US central bank risks damage to the economy by not moving rapidly to lower interest rates.

“I don’t think the economy is about to crater,” Miran said Thursday on Bloomberg Surveillance. But given the risks, “I would rather act proactively and lower rates as a result ahead of time, rather than wait for some giant catastrophe to occur,” he said.

The Fed led by Chair Jerome Powell lowered interest rates last week by a quarter percentage point, the first cut of 2025. Miran dissented against the decision, instead favoring a half-point cut.

Michelle Bowman, the Fed’s top bank cop, said inflation is close enough to the central bank’s target to justify more rate cuts because the job market is weakening.

Fed Bank of Chicago President Austan Goolsbee expressed continued concern about tariff-driven inflation and pushed back against any call for “front-loading” multiple rate cuts. His Kansas City counterpart Jeff Schmid signaled the central bank may not need to cut again soon.

Citadel’s Ken Griffin told CNBC he expects the Fed to cut its benchmark rate once more in 2025 as the central bank turns its focus to the labor market.

The Fed’s preferred gauge of underlying inflation likely grew at a slower pace last month, offering policymakers some breathing room to address weakness in the US labor market.

A report on Friday is forecast to show the personal consumption expenditures price index excluding food and energy rose 0.2% in August, compared with 0.3% in July. On an annual basis, the so-called core measure is seen holding at a still-elevated 2.9%.

“If we were to see an uptick, that could worry investors that the Fed’s rate cut expectations are too ambitious, and that they may need to establish more of a wait-and-see approach on rates,” said Stanley at Granite Bay Wealth Management.

The market is on tenterhooks waiting for the Fed’s next rate move, a crucial earnings season looms large and the threat of a US government shutdown is growing more severe.

Add the specter of rising volatility to a list of worries investors need to contend with. Since 1928, historical price swings in the S&P 500 in October have been about 20% greater than in other months, Goldman Sachs Group Inc.’s derivatives team says.

“Are stocks ready for a breather, or dare we say, some selling pressure? The short answer is yes,” said Anthony Saglimbene at Ameriprise. “Investors should expect that some form of a breather or downturn in the market will come at some point.”

For all the hand-wringing over whether the US stock market is overstreched, investors who have been hedging against a downturn are actually getting worried about missing a potential year-end rally.

That’s the message coming from derivatives markets, where a measure of the relative cost of bullish options reached a high not seen since January. Protection against a downturn, which had been rising as the S&P 500 pushed to record after record, has started to get cheaper.

Fundamental dynamics heading into the fourth quarter, including the rate environment, appear stable and supportive of current stock levels, in Saglimbene’s view. He also believes profit conditions across S&P 500 companies remain favorable and durable despite some macro headwinds.

“But expectations are high, and valuations largely reflect much of the ‘good news’ narrative today. Thus, investors should be prepared for a few potential bumps in the road at some point,” Saglimbene said.