One inflation report changed the rate conversation
U.S. stocks moved higher Wednesday after a cooler-than-expected inflation reading gave investors a reason to rethink the Federal Reserve’s next move.
The Nasdaq Composite rose roughly 1%, while the S&P 500 added about 0.6%. The Dow hovered around flat as the rally remained concentrated in technology and other growth-sensitive parts of the market.
The catalyst was the latest Personal Consumption Expenditures report, the inflation gauge the Fed watches most closely. PCE inflation rose 3.4% year over year in August, below expectations for 3.7%.
That difference was enough to move interest-rate expectations quickly.
According to CME FedWatch, traders now assign roughly a 41% probability of another Fed hike in October, down from more than 70% a week earlier. New York Fed President John Williams also said there was “no need for urgency” around another increase, reinforcing the possibility that rates could remain unchanged at the next meeting.
For technology stocks, the important change is not that rates are suddenly falling. It is that the probability of another immediate increase has dropped sharply.
Tech benefits first when rate pressure eases
Higher interest rates have been one of the biggest valuation problems facing growth stocks.
Companies whose earnings are expected years into the future are especially sensitive to changes in discount rates. When Treasury yields climb, investors generally demand a higher return from equities as well, which can pressure valuations even when the underlying businesses are performing well.
That relationship worked in reverse Wednesday.
Five of the Magnificent Seven traded higher, with Alphabet (NASDAQ: GOOGL) gaining roughly 3% around midday. The Nasdaq outperformed the broader market as investors moved back toward AI and large-cap technology names.
Nvidia (NASDAQ: NVDA) has already been one of the strongest examples of that momentum. The stock is on pace to finish the third quarter up roughly 17%, compared with about 4.3% for the S&P 500, bringing its year-to-date gain to approximately 23%.
Micron (NASDAQ: MU) reports earnings after the close, giving investors another read on AI infrastructure spending and the memory market.
The Fed still has oil and jobs to worry about
The inflation report improved the immediate setup, but it did not remove the pressures that pushed Treasury yields sharply higher this month.
Oil remains in the mid-$90-per-barrel range as the Middle East conflict continues, keeping energy-related inflation risk elevated. Higher fuel and transportation costs can filter through the broader economy and complicate the Fed’s effort to bring inflation lower.
The labor market is also holding up.
ADP reported that private employers added 90,000 jobs in September, up from 36,000 in August. A resilient jobs market gives the Fed more flexibility to keep rates restrictive if inflation stops improving.
That leaves the market in a much better position than it was a week ago, but not an easy one.
Cooler inflation has reduced the urgency for another rate hike. It has not eliminated the possibility.
If PCE continues moving lower while oil stabilizes, technology stocks could get relief from one of their biggest valuation headwinds. If energy prices push inflation higher again, the rate debate can return just as quickly.
For now, Wednesday’s rally is telling investors something simple: the market would much rather see the Fed wait.
Explore More Stories in Markets
Disclaimer
Wall Street Access is an independent financial publisher. Wall Street Access is not a financial advisor. No company mentioned has compensated Wall Street Access for the preparation, publication or distribution of this article. This content is provided for informational and educational purposes only and is not investment advice or a recommendation to buy, sell or hold any security. Investing involves risk, including the possible loss of principal.
Prices, market capitalizations, financial figures and other market data are based on information available as of the date and time of publication and may change without notice. Information is drawn from public sources believed to be reliable but is not guaranteed to be complete or accurate. Opinions and expectations expressed are our own and may change as new information becomes available.
Readers should conduct their own due diligence and contact a licensed financial professional before making any investment decision. Past performance does not guarantee future results. Any material ownership interest or conflict of interest, where applicable, will be disclosed separately.
