The Stock Market Climbs as Price Data Keeps the Fed's Bets Intact

A renewed burst of dip buying gave US equities fresh momentum heading into the weekend, after a widely watched inflation report landed right in line with forecasts. The data offered the Federal Reserve a little breathing room as it navigates signs of a cooling labor market.

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After three straight days of losses, the S&P 500 bounced back. The bond market’s reaction to the numbers was subdued, with swap traders continuing to anticipate roughly 40 basis points of Fed rate cuts before year-end 2025. Meanwhile, the US dollar softened.

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Friday’s report showed the core personal consumption expenditures (PCE) index which strips out food and energy rose 0.2% in August, down slightly from July’s 0.3% increase. On a yearly basis, the gauge held steady at 2.9%, still above the Fed’s 2% target.

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“Even though inflation remains elevated, the PCE data matched expectations across the board,” said Bret Kenwell of eToro. “That reassures investors the Fed is likely to stick with its plan for two more rate cuts this year.” He added that the 2% inflation goal seems to be taking a back seat for now, with policymakers focusing more on balancing jobs and price stability.

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Fed Chair Jerome Powell has already pointed to labor-market weakness as a reason behind September’s rate cut, while stressing the central bank remains alert to inflation risks. Ellen Zentner of Morgan Stanley Wealth Management echoed that view: “Inflation isn’t reversing, but it’s not accelerating either. Unless next week’s jobs report delivers a big upside shock, another rate cut in late October seems likely.”

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Richmond Fed President Tom Barkin noted in an interview with Bloomberg that while both inflation and unemployment are off target, he sees little risk of sharp deterioration. Despite waning consumer sentiment, the report also showed personal spending rose more than expected a sign of economic resilience.

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“This reinforces the idea that the economy is stronger than many believed, while inflation isn’t worsening,” said Chris Low of FHN Financial. Chris Zaccarelli at Northlight Asset Management agreed, pointing out that steady consumer spending is why corporate profits continue to beat expectations. “As long as people have jobs and keep spending and companies adapt the bull market has room to run,” he said.

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After the recent pullback, investors were ready to step back in. “Today’s PCE print was enough to bring buyers off the sidelines,” said David Russell of TradeStation. “No news is good news.”

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While inflation figures grabbed headlines, the income and spending data may matter more, according to Scott Helfstein at Global X. “That level of demand could sustain strong consumption and set the stage for better-than-expected third-quarter growth,” he noted.

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At Janus Henderson Investors, Greg Wilensky argued that steady economic momentum, combined with a Fed that is still poised to ease policy, should support risk assets even if valuations look stretched. The S&P 500’s forward 12-month price-to-earnings ratio recently hit 22.9, a level only topped twice this century: during the dot-com boom and the 2020 pandemic rally, when rates were near zero.

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Historically, Fed rate cuts outside of recessions have been a positive backdrop for stocks. Still, Kenwell of eToro suggested the market may need a pause after such strong gains. “If October brings a pullback, it could serve as a healthy reset, giving investors better entry points for the next phase of the rally,” he said.

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Mark Hackett of Nationwide echoed that sentiment, saying the S&P 500 is showing natural signs of fatigue after its powerful run since April. But he emphasized that positioning and sentiment remain balanced, not extreme. “With fiscal support, a softer dollar, and a Fed leaning dovish, any near-term test of support should be seen as setting the stage for the next leg higher, not the end of the bull market,” Hackett said.

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Looking ahead, traders are watching Washington closely as lawmakers remain stuck in a budget standoff.

On Friday, President Donald Trump dismissed concerns over the potential for the first US government shutdown in nearly seven years, instead blaming Democrats for any fallout. If a shutdown occurs, the release of September’s jobs report due next Friday could be delayed under the Labor Department’s contingency plans.

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“Government shutdowns often bring volatility, but historically they haven’t left lasting scars on markets,” wrote Keith Lerner of Truist Advisory Services. On average, the S&P 500 has barely moved during the past 20 shutdowns.

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“The possibility of a shutdown may jolt markets in the short term, but history shows these episodes are usually resolved quickly,” said Clark Bellin of Bellwether Wealth. He also noted that stocks are wrapping up September with resilience, despite the month’s usual reputation for weakness. “That doesn’t guarantee October will be smooth sailing,” he added, “since it’s historically the most volatile month for equities.”

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