The S&P 500 Gains as Inflation Reports Help Relaunch the Rally

U.S. equities ended a three-day slump on Friday after the Federal Reserve’s preferred inflation measure showed a modest cooling in August, reinforcing expectations for additional interest-rate cuts later this year.

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By mid-morning in New York, the S&P 500 was up 0.6%, putting the benchmark on pace to break its longest losing streak in over a month. The Nasdaq 100, heavy in tech names, added 0.32%.

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The latest government report revealed that the personal consumption expenditures (PCE) price index, excluding food and energy, climbed 0.2% in August. On an annual basis, core PCE held steady at 2.9%.

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“This report didn’t bring any surprises, and that in itself is a relief,” said Daniela Sabin Hathorn, senior market analyst at Capital.com. She explained that fears of hotter inflation had risen a day earlier after GDP data was revised higher and jobless claims came in lower than anticipated.

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Still, the year-over-year pace of inflation remains “well above the Fed’s long-term target,” noted Scott Wren, senior global market strategist at Wells Fargo Investment Institute. For now, he said, the Federal Open Market Committee appears more focused on labor market trends than on inflation itself.

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Despite progress, inflation continues to run above the Fed’s 2% target, fueling caution among some policymakers about easing too aggressively. Earlier this week, Fed Chair Jerome Powell emphasized that a softening job market was the main reason officials opted to cut rates for the first time this year at last week’s meeting.

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“The ongoing uptick in inflation complicates the Fed’s outlook,” said Katy Stoves, investment manager at Mattioli Woods. “PCE tends to provide a clearer reading than CPI because it filters out some of the noise, which makes today’s figure especially important.”

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Stoves highlighted that the latest inflation print comes against a backdrop of conflicting economic signals. A stronger-than-expected GDP revision suggested the economy is sturdier than previously thought, yet labor market data continues to point to cooling conditions.

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“Markets are still pricing in a high likelihood of another Fed rate cut at the end of October,” Stoves added. “Today’s PCE data doesn’t significantly change that expectation.”

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Equities broadly welcomed the report, with relief evident across major indexes. Investors viewed the data as supportive of the case for continued monetary easing without forcing the Fed to act more aggressively than markets have already priced in.

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Among individual movers, pharmaceutical giants Eli Lilly & Co. and Merck & Co. posted gains. Their rally came after President Donald Trump’s proposal for a 100% tariff on branded and patented drug imports included carve-outs for companies with significant U.S. manufacturing operations. The exemptions eased investor concerns about potential earnings pressure for firms with a strong domestic presence.

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Friday’s rebound suggests investors remain confident that the Fed is on track to deliver at least one more rate cut before year-end. The market’s relief rally highlights how sensitive sentiment remains to inflation and labor market data, with each release shaping expectations for monetary policy.

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While core PCE didn’t surprise to the upside, its persistence above target underscores the balancing act facing policymakers. Stronger growth signals, such as the recent GDP revision, complicate the picture for rate-setters who must weigh slowing hiring against still-elevated inflation.

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For now, traders continue to look toward the late-October FOMC meeting as the next major policy milestone. Unless inflation reaccelerates sharply or the labor market stages an unexpected rebound, markets see little reason to abandon expectations for further easing.

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