- US stocks hit fresh all-time highs, led by gains driven by AI and optimism surrounding Fed rate cuts.
- Elevated valuations raise vulnerability to negative surprises, especially if growth or inflation disappoints.
- Key catalysts this week include Powell’s speech, U.S. PMI data, and Friday’s PCE inflation release.
US equities extended their bull run on Monday, with the S&P 500 hitting a third consecutive all-time high, while futures remained steady on Tuesday. The rally was fueled by AI interest, driven by a 4% surge in Nvidia following news of a $100 billion investment in OpenAI, which further boosted the tech-heavy Nasdaq.
Investors are now questioning how long the AI momentum could sustain with such over-stretched valuations. The S&P 500 trades 10% above its 5-year average and 22% above its 10-year mean. According to Vanguard’s Joe Davis, fundamentals remain supportive, but cracks could appear soon if growth appears to be fading or inflation stays sticky.
The Fed’s first rate cut of 25 bps has provided fresh momentum to the equities, while markets anticipate two more rate cuts by the end of 2025. Historically, equities tend to rise further in the next twelve months after a rate cut, even if they are at record highs.
On the other hand, political and fiscal risks linger. A potential government shutdown looms ahead of September 30, which could weigh more heavily than in the past, given a weaker economic backdrop. Tariffs also remain a key concern as economists anticipate a 1% drag in GDP for every 10% increase in effective tariffs. While the US economy has shown resilience so far, higher costs may squeeze the corporate margin and consumer spending.
Overall, US equities are enjoying strong momentum, backed by earnings upgrades. Analysts now anticipate S&P 500 profits to rise 9.4% in 2025, up from the 7.1% projected this summer. Still, inflation, growth, and policy concerns could keep the situation fragile.
Key Events Ahead
- Jerome Powell speech (Tuesday): First remarks since the Fed’s September rate cut, guidance on inflation, and cuts.
- Micron earnings (Tuesday after market): AI-related revenue and outlook in focus.
- U.S. PCE inflation (Friday): Fed’s preferred inflation gauge, expected to be steady at 2.6% YoY.
- Government funding deadline (Sept. 30): Risk of shutdown as fiscal standoff intensifies.