Fed Signals Rate Cuts as Markets Surge Ahead of Key Earnings

Federal Reserve Chair Jerome Powell announced on Friday that the central bank is poised to adjust its monetary policy, signalling upcoming interest rate cuts. This announcement sent U.S. stock markets to near-record highs, with the S&P 500, Nasdaq Composite, and Dow Jones Industrial Average all rising over 1% for the week.

The market’s strong performance will face a test this week with the highly anticipated earnings report from Nvidia, an AI industry leader. Nvidia’s report, due Wednesday, is expected to show significant year-over-year growth, with Wall Street projecting a 109% increase in earnings and a 99% rise in revenue.

Other major companies reporting earnings this week include Salesforce, Best Buy, Dell, and Lululemon, while the Fed’s preferred inflation gauge will also draw attention.

Fed Policy Shift

Powell’s comments on Friday indicated that interest rate cuts are expected in September, although he did not specify the pace or extent of these cuts. The market has priced in four rate cuts of 0.25% each by the end of 2024, with a 38.5% chance of a 50 basis point cut at the Fed’s September meeting, according to CME’s FedWatch Tool.

Goldman Sachs economists suggested that a weaker-than-expected August jobs report could prompt a larger 50 basis point cut, while Capital Economics cautioned that a more aggressive cut might signal greater economic weakness than currently anticipated.

Powell also emphasised that the Fed remains focused on inflation, with the core Personal Consumption Expenditures (PCE) index—a key inflation measure—expected to show a 2.7% increase for July.

Nvidia Earnings in Focus

Nvidia’s earnings report is expected to be a major event for the market, with investors closely watching for updates on the company’s new Blackwell chip. The stock, which has surged 160% year-to-date, remains a key driver of the broader AI-driven market rally.

Tech stocks, particularly the “Magnificent Seven” (Apple, Alphabet, Microsoft, Amazon, Meta, Tesla, and Nvidia), have been highly volatile in recent weeks. However, some analysts believe the worst of the short-term volatility may be over, with Goldman Sachs equity strategist Ben Snider suggesting that tech stocks are now more resilient.

As the market navigates these developments, investors remain cautiously optimistic, with a focus on the potential for further gains in the tech sector and the broader market.