Before the bell

Market Highlights

• Inflation Trends: The core personal consumption expenditure (PCE) price index, the Federal Reserve’s preferred inflation measure, held steady at 2.6% annualized through July. The consistency in this measure, coupled with declining consumer inflation expectations, hinted at a moderating inflation environment.

• Interest Rate Outlook: Investors closely monitored Fed Chair Powell's speech at Jackson Hole, where he signaled that rate cuts were imminent. The bond market responded by pricing in a series of rate cuts, expected to begin at the next FOMC meeting in mid-September, which would mark a significant shift in monetary policy.

• Economic Growth: The revised second-quarter U.S. GDP report showed an upward revision to 3.0% annualized growth, driven by strong consumer spending. This bolstered confidence in the resilience of the U.S. economy, even as concerns about a cooling labor market persisted.

Notable Earnings

• NVIDIA: NVIDIA continued to dominate headlines with its impressive earnings report, reflecting the company’s pivotal role in the ongoing AI revolution. The tech titan posted an extraordinary 112% year-over-year increase in sales, driven by surging demand for its cutting-edge processing units, which power the AI initiatives of industry giants like Microsoft, Alphabet, and Amazon. Despite this staggering growth, NVIDIA’s stock faced some headwinds during the week, as investors scrutinized the sustainability of its triple-digit growth amid an increasingly competitive landscape. With its market cap soaring to $3.2 trillion, NVIDIA now accounts for a significant 7% of the S&P 500, underscoring its outsized influence on market movements. The earnings report, while robust, left the market with a lingering question: Can NVIDIA maintain its breakneck pace of growth in the quarters to come?

• Salesforce: Salesforce, a key player in the cloud computing space, delivered solid results that highlighted the company’s resilience in an evolving tech market. The firm reported an 11% year-over-year growth in earnings per share, exceeding expectations as it continued to capitalize on the digital transformation trends sweeping across industries. Salesforce’s performance was particularly noteworthy given the broader tech sector’s challenges, including rising competition and macroeconomic pressures. As a leader in customer relationship management (CRM) solutions, Salesforce’s ability to sustain growth amid a shifting landscape speaks to the strength of its business model and its strategic investments in expanding its product offerings. The earnings report reinforced the company’s position as a bellwether for the tech sector, with its results likely to influence sentiment and investment decisions across the industry.

S&P 500 Performance before and after 1st rate cut

This graph illustrates the performance of the S&P 500 before and after the first Federal Reserve rate cut, averaged over nine easing cycles. The data is divided into three categories: scenarios where a recession followed the rate cut (red line), where no recession followed (blue line), and the overall average performance (black line). The x-axis represents the number of weeks before and after the first rate cut, with week 0 marking the cut. The y-axis indexes the performance to 100.

Before the rate cut, the S&P 500 generally trended upward, reflecting investor optimism or stability leading up to the easing of monetary policy. After the rate cut, the graph shows a significant divergence based on whether a recession followed. In scenarios without a recession, the S&P 500 continued to rally strongly, with gains accelerating over the following year. In contrast, when a recession followed the rate cut, the market experienced a brief rally but then declined sharply, falling below pre-cut levels and continuing a downward trend for nearly a year. The average line reflects a moderate increase post-rate cut, suggesting that while rate cuts can provide a short-term boost to equity markets, the long-term outcome heavily depends on the broader economic context, particularly the onset of a recession.

Outlook Snapshot: The Week Ahead

As we look to the week ahead, investors and market watchers will be keeping a close eye on several key events that could shape the trajectory of the markets. The highly anticipated earnings report from NVIDIA set the stage for what could be a volatile week, especially as the market digested the implications of the company's performance on the broader technology sector. Additionally, the release of the July personal consumption expenditures (PCE) inflation data on Friday was expected to provide critical insights into whether inflation trends were indeed moderating, as suggested by recent consumer confidence reports. With the Fed’s September meeting fast approaching, the data could influence the size and timing of the expected rate cuts, potentially setting the tone for market sentiment in the weeks to come. As the summer winds down, investors would also be bracing for the traditionally volatile period leading up to the November elections, a time historically characterized by increased daily fluctuations and lower returns. In this uncertain environment, corporate earnings, economic data, and policy signals from the Fed would be the key factors to watch, as they would likely dictate the direction of both equity and bond markets moving forward.