Stocks Halt Record-Breaking Rally in Fed Countdown: Markets Wrap

(Bloomberg) — Wall Street traders gearing up for the Federal Reserve decision refrained from making big bets as they awaited clues on the path of rates that will shape the outlook for markets over the next few months.

A solid reading on retail sales did little to move trading, with a rally in equities fading near a record and bonds edging higher.

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The value of retail purchases, not adjusted for inflation, increased 0.6% after a similar gain in July. The control-group sales — which feed into the calculation of goods spending for gross domestic product — climbed 0.7%, indicating a healthy quarter.

“The American consumer appears to be in good spirits,” said Ellen Zentner at Morgan Stanley Wealth Management. “That’s good news for the economy, but it may heighten debate over how aggressively the Fed needs to cut rates.”

While Fed officials are still focused on bringing inflation to their target, they’re widely expected to cut rates in an effort to shield the labor market from further deterioration.

“Even if the job market is weak, it’s not hurting the consumer yet,” said David Russell at TradeStation. “While these numbers won’t prevent the Fed from cutting rates tomorrow, they reduce some of the longer-term dovish hopes.”

The S&P 500 lost 0.1%. The Nasdaq 100 halted a nine-day advance. Treasuries held gains after a solid sale of 20-year bonds. The yield on two-year notes slid three basis points to 3.51%. The dollar fell. The euro hit its highest since 2021.

US PREVIEW: FOMC to Cut Rates Amid Open and Silent Dissents

To Bret Kenwell eToro, given the recent labor-market data, retail sales were a big question coming into this week.

“In other words, would the recent job weakness impact consumer spending? The short answer appears to be no,” he said.

Kenwell noted that earnings estimates continue to move higher and consumer spending remains solid. Provided these tailwinds remain in place, equities can continue to perform well, even if the market takes a breather, he said.

“Further, it’s important to note that historically, risk assets perform well when the Fed starts cutting rates in non-recessionary environments,” said Jeff Roach at LPL Financial.

While the retail-sales report was another piece of good economic news, much of the recent stock rally has been driven by expectations of six rate cuts over the next 12 months, according to Florian Ielpo at Lombard Odier Investment Managers.

“These six cuts can only come if the job-market deterioration is material and the equity performance that came with it is dependent over it,” he said.

Bonds Hint Growth, Not Inflation, Is Now Stocks’ Chief Concern

With the Fed’s post-meeting statement set to be released at 2 p.m. on Wednesday, investors will look for changes in the latest quarterly rates projections, known as the dot plot, and pore over Jerome Powell’s remarks a half-hour later.

Recent speculation about the need for a 50-basis point rate cut is not justified by the current data, according to Seema Shah at Principal Asset Management. Broader economic indicators — including earnings and credit spreads — do not reflect the kind of deterioration typically warranting that level of action, she said.

“We join the chorus of voices anticipating a 25 basis-point Fed cut tomorrow,” noted Lauren Goodwin at New York Life Investments. “That said: though we expect the market reaction to the Fed meeting to have a ‘sell the news’ flavor, we’d fade that pessimism in the near term.”

Money markets are fully pricing in a quarter-point Fed reduction Wednesday, and a series of interest-rate cuts over the next year. An outlook echoing that view would be an encouraging sign for stock bulls, who have largely banked on a gradual easing path that keeps the economy from sliding into a recession.

While some investors are expecting a “sell the news” event, since Wednesday’s expected rate cut is widely priced in, Glen Smith at GDS Wealth Management sees no obvious reason for a post-Fed selloff, given how earnings are still very strong and since the artificial intelligence theme is still intact.

“Even though stocks are at record highs, we are not seeing signs of euphoria,” he said. “The IPO market has only recently started to unfreeze, and many investors are focused on the recent slowdown in hiring. Stocks still have more room to climb the wall of worry.”

The equity options market is predicting a roughly 0.7% swing following the Fed meeting on Wednesday, tied for the second lowest expected move in the last 18 months, according to data from Susquehanna International Group.

A survey conducted by 22V Research showed respondents are leaning “risk-on” (43%) reacting to the Fed meeting, 31% said “mixed/negligible” and 26% “risk-off.”

“We expect a 25 basis-point cut this week to be followed by three more cuts of the same size consecutively in the coming months, creating a favorable backdrop for the equity rally,” said Ulrike Hoffmann-Burchardi at UBS Global Wealth Management.

Bank of America Corp.’s latest survey showed a net 28% of global fund managers are overweight equities. Opinions about growth showed the sharpest improvement in almost a year.

There are “bulls galore” as the risk of a “recessionary trade war” has ebbed, BofA strategist Michael Hartnett wrote in a note. He added that equity exposure isn’t at extreme levels yet, which bodes well for the rally to continue for now.

A rally that has taken US stocks to fresh records could experience turbulence in coming weeks before finishing the year with a flourish, according to Citadel Securities’ Scott Rubner. Near-term risks include stretched valuations, the seasonal volatility that has tended to occur in September and October and possible selling from trend-following funds.

Any potential weakness is unlikely to last, however, as the tailwinds that have buoyed stocks — including corporate spending on artificial intelligence and demand from retail traders — give them a lift in the closing months of 2025, Rubner said.

Worries have been mounting that the S&P 500’s surge becoming a bubble. While critics point to the tech sector’s outsize influence on this year’s gain, it’s the rest of the market that is starting to look a bit overpriced, according to Seaport Research Partners.

An index of S&P 500 companies that excludes the technology sector has risen a solid 13% over the last year, but has seen profits grow by just 6.4%, according to data compiled by Bloomberg Intelligence. The S&P 500 Information Technology index has surged 27%, a rate that looks more restrained when put up against the sector’s earnings growth of 26.9%.

The resilience of the economy, combined with rate cuts, are going to keep this bull market running, noted Chris Zaccarelli at Northlight Asset Management.

“It always sounds smarter to be bearish and see threats around every corner, but a market that refuses to go lower – especially during the worst months of the year – sends a strong signal that dips should be bought in 2025,” he said.

Corporate Highlights:

TikTok’s American operations would be acquired by an investor consortium that includes Oracle Corp., Andreessen Horowitz and private equity firm Silver Lake Management LLC under a framework deal that US President Donald Trump is set to discuss with Chinese President Xi Jinping later this week. Treasury Secretary Scott Bessent said US negotiators expressed disappointment to their Chinese counterparts when they learned during trade talks of China’s ruling that Nvidia Corp. had violated anti-monopoly laws with a high-profile 2020 deal. Alphabet Inc.’s Google said it will invest £5 billion ($6.8 billion) over two years in the UK to help build an artificial intelligence economy in the country. President Trump filed a $15 billion defamation suit against The New York Times Co. and Penguin Random House LLC, accusing the paper of serving as a “mouthpiece” for the Democrats. Boeing Co.’s striking defense workers will vote Friday on a contract proposal drafted by union leaders that includes a 20% guaranteed wage increase and $10,000 signing bonus aimed at ending a six-week labor standoff. United Airlines Holdings Inc. Chief Executive Scott Kirby says improving travel demand going into the fall indicates the economy is stronger than statistics show. Binance Holdings Ltd., the world’s largest crypto exchange, is moving toward a potential deal with the US Justice Department that would allow it to drop a key oversight requirement in its $4.3 billion settlement of allegations that it didn’t do enough to prevent money laundering, according to people familiar with the matter. Ralph Lauren Corp. sees revenue growth remaining similar to recent rates over the next three years, according to the preppy fashion company’s latest strategic outlook. Walt Disney Co. is bringing all of its marquee comics to a new digital platform and app in partnership with Webtoon Entertainment Inc., sending shares of the upstart company soaring. Walt Disney, Comcast Corp.’s Universal Studios and Warner Bros. Discovery Inc. are suing Chinese artificial intelligence startup MiniMax, accusing the company of pirating the studios’ intellectual property. Rithm Capital Corp. is nearing a purchase of office landlord Paramount Group Inc. Nestlé SA Chairman Paul Bulcke will step down early after investors questioned his handling of the ouster of the food company’s former chief executive officer due to an undisclosed romantic relationship with a subordinate. Dye & Durham’s shares plunged Tuesday after the legal software provider said it will miss the deadline for submitting its annual report, adding another hurdle for a company that has already faced pressure from an activist shareholder this year. Novo Nordisk A/S plans to seek US regulatory approval for a high-dose version of its blockbuster weight-loss shot Wegovy, another effort to counter Eli Lilly & Co. in the booming obesity market. Anglo American Plc and Teck Resources Ltd. haven’t done enough yet to show the advantages of their merger to the Canadian economy, said the country’s industry minister, who plans to meet with the companies’ chief executive officers next week. Thyssenkrupp AG has received a takeover offer for its steel division from India’s Jindal, opening a new chapter in the drawn-out search for a new owner of the struggling business. Tencent Holdings Ltd. raised 9 billion yuan ($1.27 billion) on Tuesday from its first bond sale in four years. What Bloomberg Strategists say…

“Ahead of a presumptive interest-rate cut from the Federal Reserve, US stock valuations have reached levels comparable to those seen ahead of the dotcom bubble burst. If the S&P 500’s current price of 22.6x forward earnings were to hold until Wednesday — when the Fed is expected to deliver a quarter-point reduction — it would mark the highest multiple coinciding with a rate cut, in Bloomberg data going back to 1990.”

—Tatiana Darie, Macro Strategist, Markets Live. For the full analysis, click here.

Some of the main moves in markets:

Stocks

The S&P 500 fell 0.1% as of 4 p.m. New York time The Nasdaq 100 was little changed The Dow Jones Industrial Average fell 0.3% The MSCI World Index was little changed Bloomberg Magnificent 7 Total Return Index rose 0.5% The Russell 2000 Index was little changed Currencies

The Bloomberg Dollar Spot Index fell 0.5% The euro rose 0.8% to $1.1860 The British pound rose 0.4% to $1.3652 The Japanese yen rose 0.6% to 146.50 per dollar Cryptocurrencies

Bitcoin rose 1.2% to $116,836.23 Ether fell 0.5% to $4,491.29 Bonds

The yield on 10-year Treasuries was little changed at 4.03% Germany’s 10-year yield was little changed at 2.69% Britain’s 10-year yield was little changed at 4.64% The yield on 2-year Treasuries declined three basis points to 3.51% The yield on 30-year Treasuries was little changed at 4.65% Commodities

West Texas Intermediate crude rose 2% to $64.58 a barrel Spot gold rose 0.3% to $3,689.78 an ounce ©2025 Bloomberg L.P.