US stock buyers step in as data keep Fed bets in play

The response to the data was fairly muted in the bond market, and swap traders continued to price in around 40 basis points of Fed cuts before the end of 2025. The dollar fell

A renewed wave of dip buying lifted stocks in the final stretch of the week as a key inflation gauge grew at a slower pace last month, giving the Federal Reserve some breathing room to address labor-market cooling.

Following a three-day slide, the S&P 500 rebounded. The response to the data was fairly muted in the bond market, and swap traders continued to price in around 40 basis points of Fed cuts before the end of 2025. The dollar fell.

A report Friday showed 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 core measure remained at 2.9% - above the Fed’s target.

“Despite another month of elevated inflation, today’s PCE report was in-line across the board,” said Bret Kenwell at eToro. “That gives investors some relief that the current status quo will remain intact, and that the Fed will remain on track to cut rates two more times this year.”

Kenwell also says that the Fed’s 2% inflation goal seems to be a “low priority” right now, with policymakers trying to restore balance between jobs and inflation.

Fed Chair Jerome Powell pointed to a cooling labor market to explain why officials lowered rates in September, while remaining vigilant on inflation.

“Inflation may not be reversing, but it’s not reaccelerating,” said Ellen Zentner at Morgan Stanley Wealth Management. “Barring a major upside surprise from next week’s jobs report, the Fed should remain on course to deliver another rate cut in late October.”

Fed Bank of Richmond President Tom Barkin told Bloomberg Television that while unemployment and inflation have both moved away from the goals, he sees only limited risk of further deterioration.

Despite a slide in consumer sentiment, Friday’s data also showed US personal spending rose in August by more than forecast — illustrating resilience.

“Today’s data reinforces yesterday’s ‘gee-the-economy-is-much-stronger-than-anyone-thought’ narrative, but at the same time, there’s less to worry about on the inflation front,” said Chris Low at FHN Financial.

Actions speak louder than words and consumers continue to spend, which is why corporate profits continue to exceed expectations, according to Chris Zaccarelli at Northlight Asset Management.

“The bull market is going to continue as long as consumers remain employed and continue to spend, and corporations are able to adjust and adapt to the conditions on the ground,” he noted.

“Following a three-day pullback in the broader market, this is good enough to pull buyers off the sidelines,” said David Russell at TradeStation. “Today’s PCE calms some of those worries. No news is good news.”

While inflation likely gets the headline in today’s data, the income and spending numbers may be more important, according to Scott Helfstein at Global X.

“This likely sustains strong consumption and possibly leads to better than expected third-quarter growth,” he noted.

At Janus Henderson Investors, Greg Wilensky says continued strength in overall economic activity and a Fed that remains likely to lower rates will likely provide support for risk assets.

That’s despite valuations that, on the surface, appear expensive, he said.

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 cutting rates in non-recessionary environments tends to be good for US stocks, markets could use a bit of a breather as we enter the fourth quarter and as certain pockets of the market are seeing some euphoria, noted Kenwell at eToro.

“Should a pullback materialize in October, it could be the dip that refreshes the rally and gives investors a more attractive entry point into the market,” he said.

After one of the strongest stretches for equities since April, the S&P 500 is showing natural signs of fatigue, according to Mark Hackett at Nationwide. Yet positioning and sentiment remain far from extreme, suggesting investors are more cautious than complacent.

“With fiscal stimulus, a potential dovish Fed shift, and a softer dollar all looming as catalysts, any near-term test of technical support should be seen less as a reversal and more as setting the stage for the next leg of the bull run,” he said.

Looking ahead, traders will be closely watching news regarding the funding stalemate in Congress.

“It is possible that Congress will reach a late deal averting a shutdown, but with lawmakers on both sides of the aisle digging in against the other’s demands, the chances of an agreement seem to be slipping away,” said Thomas Ryan at Capital Economics.

President Donald Trump on Friday shrugged off the threat of the first US government shutdown in nearly seven years and moved to cast the blame for any disruption on Democrats.

The September jobs report, set for release next Friday, will be delayed in the event of a federal government shutdown if the Department of Labor adheres to an operational contingency plan spelled out earlier this year.

From a markets perspective, Hackett at Nationwide says a shutdown would likely be more of a news event than a market-shifting one. Over the past 30 years, the S&P 500 has increased during the five shutdowns or funding gaps, he noted.