Wall Street regains ground, but interest rates limit optimism
Wall Street closed the week higher, though interest rates are still setting the pace. Inflation isn't easing and bonds now compete with stocks. What to watch in September? Here's the context.
Wall Street ended the week with moderate gains, although the rise in the major indexes came with mixed signals.
The S&P 500 and Nasdaq recovered some of the ground they had lost, while investors began paying closer attention to a factor that could determine how markets perform in September: the path of interest rates.
The week delivered an important takeaway: enthusiasm around artificial intelligence remains strong, but it is no longer enough on its own to sustain the market’s momentum.
The Fed takes center stage again
Kevin Warsh’s speech at Jackson Hole shifted part of the conversation on Wall Street. Instead of focusing solely on the possibility of rate cuts, investors began considering again the risk that interest rates could remain elevated for longer.
Inflation remains the main obstacle. The PCE index showed that prices continue to rise above the Federal Reserve’s 2% target, limiting the room for a more accommodative monetary policy.
For stocks, particularly growth stocks, this matters because higher interest rates reduce the attractiveness of future earnings and can put pressure on valuations.
Bonds are making a difference again
The bond market is sending a signal investors cannot ignore.
Treasury yields remain elevated, reflecting uncertainty over how long interest rates will stay high. If yields continue to rise, stocks will have to compete with fixed-income assets offering higher returns.
This could create greater volatility, particularly among technology companies trading at elevated valuations.
That is why, over the coming weeks, it will be important to watch not only the S&P 500 and Nasdaq, but also the performance of the 10-year U.S. Treasury yield.
The Market is becoming more concentrated
Another interesting signal is that Wall Street’s gains continue to depend heavily on large technology companies.
Nvidia’s strong performance helped boost the Nasdaq, but many other stocks did not advance at the same pace. This highlights an important difference between indexes rising and the broader market showing a strong trend.
If more sectors begin participating in the gains, the rally could be considered healthier. If the advance remains concentrated in a handful of companies, any correction in those stocks could have a greater impact on the major indexes.
Oil is no longer the main concern
After the strong rally seen previously, oil prices lost some of their momentum last week.
More moderate crude prices reduce some of the pressure on inflation and, consequently, could make the Federal Reserve’s job easier. However, geopolitical tensions remain a risk and could trigger new moves in energy prices.
For now, oil has gone from being one of the main sources of concern to a factor that markets continue to monitor closely.
What comes next?
The market is entering a new phase in which economic data will carry increasing weight.
The next major event will be the U.S. employment report. Investors will be looking for signs of how strong the labor market remains and whether the economy is losing enough momentum to justify a more accommodative monetary policy.
An overly strong jobs market could keep interest rates elevated. A significant deterioration in employment could increase expectations for rate cuts.
Last week left the market caught between two opposing forces.
On one side, large technology companies and investment in artificial intelligence continue to support stocks. On the other, inflation and Treasury yields are reminding investors that money is still not cheap and that the Federal Reserve remains cautious.
The next phase of the market could depend less on new highs in technology and more on one fundamental question: Can the U.S. economy continue growing without keeping inflation too high?
The answer will be crucial in determining whether Wall Street can maintain its upward trend in the weeks ahead.
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Sources: Bloomberg, Reuters Energy, CNBC Markets, ISM Manufacturing Report