The Federal Reserve's expectation for interest rate cuts has slowed down, is the US stock market facing volatility?

The aggressive interest rate cut expectations of the Federal Reserve have recently been "doused with cold water," causing many investors to re-evaluate the future trend of the US stock market. Monetary policy has always been a focus of market attention, and after the interest rate meeting in September, the US stock market welcomed a continuous four-week rise. However, the strong performance of the labor market has greatly cooled the expectation of interest rate cuts. In the following week, will the US stock market fluctuate due to this change? Let's analyze it together.

The Federal Reserve's interest rate cut "cooling down," is the US stock market's upward trend in danger?

Recently, the Federal Reserve's attitude towards the market has undergone subtle changes. The monetary policy that once made investors look forward to interest rate cuts now seems to be gradually becoming cautious. Federal Reserve Chairman Powell clearly stated in his latest speech: "We intend to maintain the robust operation of the economy, but the future interest rate cuts will be cautious."

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This statement undoubtedly poured a bucket of cold water on the market. Investors once expected that the policy meetings in November and December would bring a larger interest rate cut - even a reduction of 25 basis points. The strong performance of the labor market and the rapid expansion of the service industry have created new expectations for the Federal Reserve's actions.

Labor Market: The "Weather Vane" of the Federal Reserve's Decision

The job market is the cornerstone of the economy, especially when the Federal Reserve formulates monetary policy, labor force data is often an important basis for decision-making. According to the latest data, the United States added 250,000 jobs in September, a number that far exceeded market expectations. In addition, the employment growth data for August and July have also been revised upwards. The unemployment rate dropped from 4.2% to 4.1%, showing the health and resilience of the labor market.

Not only that, the number of job vacancies in the United States also reached the highest value in three months. The performance of the service industry is even more eye-catching. The Institute for Supply Management (ISM) reported that the service industry index in September rose to 54.9%, setting a new high since February 2023. This series of data indicates that the progress of the US economic recovery has exceeded market expectations and added variables to the Federal Reserve's interest rate cut plan.

However, strong employment data has also brought market concerns - will the continued strength of the labor market make the Federal Reserve more cautious and thus slow down the pace of interest rate cuts? Investor sentiment began to fluctuate, and some analysts believe that the US stock market may face certain downward pressure in the coming months.

US Treasury Yield Rises: The Market's "Barometer"Interest rate fluctuations often have a direct impact on U.S. Treasury yields. Data shows that the 2-year U.S. Treasury yield, closely related to expectations of a Federal Reserve rate cut, rose by 36.7 basis points, marking the largest single-week increase in 16 months. Meanwhile, the benchmark 10-year U.S. Treasury yield also increased by 22.9 basis points. This indicates that the market is filled with uncertainty about future monetary policy, and investors are beginning to seek safe-haven instruments for potential risks.

Nonetheless, data from the Chicago Mercantile Exchange's Fed Watch indicates that the market's expectation for a 25 basis point rate cut in November remains around 90%. Barclays Bank points out that the strong performance of the labor market has undermined the perception of weakening labor demand, which may lead the Federal Reserve to be more cautious in its decision-making on rate cuts.

How will the U.S. stock market perform in the future? What factors should investors be wary of?

Although the current sentiment in the U.S. stock market is optimistic, geopolitical factors, inflation data, and the upcoming earnings season in the coming weeks could become key factors affecting the market.

1. Inflation data and the Federal Reserve's policy adjustments

The Consumer Price Index (CPI) and the Producer Price Index (PPI) to be released next week will provide the market with more clues about the trend of inflation. Although inflation data has been moving towards the Federal Reserve's target, the situation in the Middle East and fluctuations in the global supply chain may exacerbate price pressure. If inflationary pressures exceed expectations, it could further complicate the Federal Reserve's monetary policy decisions.

2. Third-quarter earnings season: Can company performance support market gains?

The third-quarter earnings season for U.S. stocks is about to begin, and investors will focus on profit reports from major banks such as JPMorgan Chase, Wells Fargo, and BlackRock. According to FactSet's forecast, the earnings growth rate for the S&P 500 index in the third quarter is 4.6%, down from 7.8% at the beginning of the quarter. If corporate earnings fail to meet expectations, the market may experience a correction.

Investor sentiment is optimistic, but caution is advised.Despite numerous uncertainties, the overall sentiment among investors remains optimistic. The bull market indicator released by Bank of America shows that investor sentiment has reached its highest level since December 2023. Strong inflows into emerging market stocks and robust performance in the credit market have provided support for the market.

US equity strategist Kostin cautions that while the target for the S&P 500 index has been raised to 6,300 points, investors still need to remain vigilant as market uncertainties increase in the coming months. He points out: "Although the US economy continues to show strong resilience, issues such as the situation in the Middle East and inflationary pressures may cause short-term volatility in the market. Despite the performance of the labor market and the service industry demonstrating the resilience of the US economy, inflation data, geopolitical risks, and the upcoming earnings season are all factors that investors need to closely monitor."