- Strong equity inflows, led by optimism in large-cap tech and AI, keep Wall Street near record highs.
- Fed’s balancing act between labour softness and inflation risks, alongside looming shutdown uncertainty, shapes sentiment.
- Upcoming core PCE data could determine whether the rally broadens or falters under pressure from rising yields.
US equities started the week with fresh optimism as equity fund inflows surged, reflecting a higher investor appetite for growth themes and anticipation of policy support. According to Reuters, $12 billion flowed into US equities in the week ending September 24. This was the strongest weekly inflow in several months, benefiting the large-cap tech stocks. The AI narrative also remains a key driver, with investors continuously betting on productivity gains and capital expenditure in data infrastructure.
However, the policy backdrop remains a defining force. The New York Fed President, John Williams, noted that the recent rate was meant to ease pressure on the labor market while acknowledging the risks of elevated inflation. The remarks highlight the delicate balancing act of the Fed, which is to support the weakening job market without reigniting inflationary pressure. Market participants are divided on whether the further cuts will be front-loaded or spaced out. The debate directly shapes the equity positioning.
Goldman Sachs upgraded the global equities to “overweight”, further supporting the sentiment amid improved fundamentals. The bank expects the US equities to outperform, provided the capital flows continue into tech and growth-linked sectors. Yet, the warning signs have become more apparent as labor market cracks have become more apparent, with wage growth and hiring slowing outside of healthcare and social assistance. Some analysts argue that the US labor market is relying on its last pockets of resilience, raising doubts about the Fed’s easing and whether it will be enough to support the labor market.
Compounding the uncertainty, the risk of a US government shutdown, combined with the delay in crucial data releases, could weigh heavily on US equities. Traders would then heavily rely on Fed speeches and alternative indicators to find cues about the policy path.
Despite the risks, the Wall Street rally remains resilient, with the S&P 500 hovering near record highs, underpinned by gains in tech and AI, although the industrial and financial sectors lag. A weaker dollar on Friday provided further relief to equities, while higher Treasury yields reminded investors of the volatility embedded in the market.
Looking ahead, the US JOLTS job opening data, along with speeches from Fed’s Goolsbee and President Trump, are essential to watch.
