(Bloomberg) — A rally that put stocks on the brink of all-time highs sputtered and bond yields rose as euphoria around Federal Reserve rate cuts eased just days ahead of a key inflation reading.
While Jerome Powell on Friday signaled a September rate cut is likely amid downside risks to the jobs market, doubts over the pace of those reductions lingered on Wall Street. In addition to officials remaining divided, traders are bracing for a not-so-friendly price reading later this week.
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Policymakers are grappling with inflation that’s still above their 2% goal — and rising — and a labor market that’s showing signs of weakness. That unnerving reality, which pulls policy in opposite directions, is made worse by a high degree of uncertainty about how each of those factors will evolve over the coming months.
The Fed’s preferred gauge of underlying inflation probably ticked higher last month, with the personal consumption expenditures price index excluding food and energy rising 2.9% from a year ago. That would be fastest annual pace in five months.
“Now the discussion will likely turn to how aggressive the Fed may be,” said Chris Larkin at E*Trade from Morgan Stanley. “Signs of a slowing labor market currently appear to be outweighing inflation concerns, but the Fed hasn’t abandoned its 2% target.”
About 400 shares in the S&P 500 fell, with the gauge dropping 0.4%. Nvidia Corp. climbed ahead of its results while fellow megacap Alphabet Inc. hit an all-time high. The yield on 10-year Treasuries rose three basis points to 4.28%. The dollar gained.
“Today’s trading lacks catalysts,” said Jose Torres at Interactive Brokers. “Part of that sluggishness results from traders reevaluating Chair Powell’s dovishness. While folks are generally in consensus about a September cut, October and December are still live, data-dependent meetings.”
Money markets are pricing in roughly 80% odds of a Fed rate cut in September, and a total of two reductions by the end of the year.
To Krishna Guha at Evercore, the repricing of a September rate cut after Powell’s Jackson Hole speech Friday was “not excessive.”
“If we are right, the focus shifts to what happens after September,” Guha said. “If the next set of labor data is not too bad, we think the Fed will begin to frame out the cautious recalibration cut, while seeking to contain expectations of ‘too much too soon’.”
Dovish or Hawkish Cut?
“While we still see the Fed cutting in September, we now have to figure out whether it will be a ‘dovish cut’ or a ‘hawkish cut’,” said Andrew Brenner at NatAlliance Securities. “We don’t want one to think that inflation is not that important, but the real unknown risk to the economy is the employment situation.”
The exact path forward, particularly the pace of rate cuts, is still up for debate as Fed officials hold diverging views on the potential impact of tariffs and the overall state of the economy, according to Jason Pride and Michael Reynolds at Glenmede.
“Upcoming leadership changes at the Fed may mark a dovish shift over the long-term, with most candidates under consideration for chair broadly viewed as more accommodative than Powell,” they said.
National Economic Council Director Kevin Hassett indicated President Donald Trump’s decision on who should succeed Powell is months away. His term as Fed chair is set to expire in May.
“We expect Powell to advocate for easing at the September meeting unless incoming data, such as a strong August labor report or higher-than-expected inflation, provide reason to stay on hold,” said Ulrike Hoffmann-Burchardi at UBS Global Wealth Management. “Against this backdrop, we anticipate four quarter-point rate cuts through January 2026, starting in September.”
Investors will also monitor comments from US policymakers at public events this week to gauge their appetite for a September rate cut, with Fed Governor Christopher Waller scheduled to speak on Thursday.
Fed Bank of Dallas President Lorie Logan said money markets could face temporary pressures around quarter-end next month, though the US central bank still has room to continue reducing its balance sheet.
“We also look for Fedspeak this week to generally echo Powell’s view that the Fed can ease in September on shifting concerns towards the labor market,” said Oscar Munoz and Eli Nir at TD Securities.
At Glenmede, the strategists noted that resuming the rate cut cycle will likely be a tailwind for bonds. Fixed income may offer upside potential for investors as yields across major fixed income categories remain near fair value.
“Small caps may stand to benefit most from easing, with more than half of their debt charging floating rate interest,” they said. “Lower interest expenses could notably lift earnings, potentially setting the stage for a small cap comeback into year-end.”
Aside from the macro picture, the next big test for the stock market will be a read on what’s been driving gains for the past few years: artificial-intelligence euphoria.
Nvidia Corp. – the last of the “Magnificent Seven” to report earnings – is due to unveil its results Wednesday after the close. Traders are hoping it can soothe fears about AI spending and effectively confirm that the stock market’s latest rally isn’t just a technology bubble.
“Unless we get some sort of major UFO (UnForeseen Occurance), the most important development of this week will be the earnings report and guidance out of Nvidia,” said Matt Maley at Miller Tabak.
“Those earnings will be good. The only question will be whether they’re good enough to push the stock higher after almost doubling over the past 4-5 months,” he added.
Nvidia’s size, it’s the biggest weight in the S&P 500 at almost 8%, and its position at the center of AI development have made it a bellwether of the broader market. The tech giant’s chips are everywhere, 40% of its revenue comes from Meta Platforms Inc., Microsoft Corp., Alphabet Inc. and Amazon.com Inc. — all are among the Top 10 weightings in the S&P 500.
Through several measures, big tech has become very influential, and that level of concentration suggests these stocks don’t just influence the market, but they increasingly drive the overall direction of travel, noted Anthony Saglimbene at Ameriprise.
“In isolation, that could be a caution flag,” he said. “We believe big tech’s market cap heft and elevated valuations today are supported by unusually strong profitability and cash flow generation relative to almost every other corner of the market.”
Even so, elevated expectations raise the bar.
“And the margin for error is shrinking,” he said. “These dynamics could create near-term air pockets from time to time. However, the same forces that pushed these mega-cap tech companies to the top of the S&P 500 (e.g., superior growth, superior margins, and superior cash flow generation) continue. The onus now is on execution.”
Corporate Highlights:
Elon Musk accused Apple Inc. and OpenAI in a lawsuit of unfairly favoring the artificial intelligence app across iPhones and thwarting competition for other chatbot makers. Warren Buffett’s Berkshire Hathaway Inc. isn’t in the market for a deal to buy a competing railroad. Buffett told CNBC on Monday that he met with the CSX Corp. chief executive officer earlier this month to discuss cooperation, while indicating he wouldn’t make a bid for CSX. A Berkshire spokesperson confirmed the comments. The Trump administration is working to halt development of an offshore wind project planned near Maryland, in the latest escalation of the White House’s war on the clean energy source loathed by the president. KPop Demon Hunters, an animated musical released by Netflix Inc., topped the US and Canadian box office during its two-day theatrical debut, a rare win at theaters for the streaming giant, which usually avoids chasing box office revenue for its original movies. Wayfair Inc. and RH tumbled on Monday as President Donald Trump said late Friday the US is conducting a “major Tariff Investigation on Furniture coming into the United States,” setting the stage for industry-specific levies. Keurig Dr Pepper Inc. agreed to buy JDE Peet’s NV for €15.7 billion ($18.4 billion) to bolster its struggling coffee business before kicking off a split of its operations. Thoma Bravo has agreed to buy Verint Systems Inc. for $1.23 billion in cash, just days after announcing a $12.3 billion takeover of Dayforce Inc. Galaxy Digital, Multicoin Capital and Jump Crypto are in talks with potential backers about raising roughly $1 billion to accumulate Solana, in what would be the largest treasury dedicated to the digital token. Webull Corp. will let US customers buy and sell cryptocurrencies on its trading platform again after dropping the service in 2023 when it was trying to go public. AbbVie Inc. agreed to buy an experimental depression treatment from Gilgamesh Pharmaceuticals Inc. for up to $1.2 billion in a deal that highlights the drug industry’s growing interest in next-generation psychedelic compounds. Orsted A/S sank after the Trump administration blocked construction of an almost-finished offshore wind farm, throwing a wrench into a planned 60 billion kroner ($9.4 billion) share sale backed by the government. The Pinault family has reached out to potential buyers of Puma SE after the German sports brand lost about half of its market value in the past year, according to people familiar with the matter. PDD Holdings Inc. posted better-than-expected results after China’s government ramped up stimulus to galvanize consumers and offset the economic fallout from US tariffs. What Bloomberg strategists say…
“The mix of underperformers in Monday’s session is geared toward consumer sectors that are highly sensitive to inflation, which could stand in the way of cuts even after Powell tilted the emphasis onto a weakening labor market.”
— Kristine Aquino, Managing Editor, Markets Live.
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Some of the main moves in markets:
Stocks
The S&P 500 fell 0.4% as of 4 p.m. New York time The Nasdaq 100 fell 0.3% The Dow Jones Industrial Average fell 0.8% The MSCI World Index fell 0.6% Bloomberg Magnificent 7 Total Return Index rose 0.4% The Russell 2000 Index fell 1% Currencies
The Bloomberg Dollar Spot Index rose 0.5% The euro fell 0.9% to $1.1610 The British pound fell 0.5% to $1.3454 The Japanese yen fell 0.6% to 147.82 per dollar Cryptocurrencies
Bitcoin fell 2% to $110,537.51 Ether fell 7.6% to $4,421.36 Bonds
The yield on 10-year Treasuries advanced three basis points to 4.28% Germany’s 10-year yield advanced four basis points to 2.76% Britain’s 10-year yield was little changed at 4.69% The yield on 2-year Treasuries advanced three basis points to 3.73% The yield on 30-year Treasuries advanced two basis points to 4.89% Commodities
West Texas Intermediate crude rose 1.8% to $64.78 a barrel Spot gold fell 0.2% to $3,365.38 an ounce ©2025 Bloomberg L.P.