The Stock Market Rallies After NVIDIA Makes a Bullish Call, With Shares Up 11%

Stocks rebounded as chipmakers led a rally, spurred by economic data that reinforced expectations for the Federal Reserve to signal a rate cut in September.

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Equities saw significant gains, with Nvidia Corp. surging 11% after Morgan Stanley analysts named it the top U.S. chip pick. Advanced Micro Devices Inc. also jumped on a positive outlook. As Meta Platforms Inc. prepared to report earnings, investors hoped it would fare better than Microsoft Corp. and Alphabet Inc. in convincing Wall Street of the benefits of heavy AI spending.

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Despite a busy earnings period and ongoing news, the central focus was on the Fed, which was not expected to lower rates on Wednesday. However, even if officials believe rates should decrease, they might hesitate to avoid unsettling the market. The Fed must carefully balance its message to avoid alarming traders about potential economic weakness or appearing indecisive about inflation.

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Former St. Louis Fed President James Bullard emphasized the delicate position the Fed is in, noting that waiting for more data before cutting rates could raise questions about what might disrupt the decision. Thierry Wizman of Macquarie echoed this sentiment, stating that a too-strong signal of a rate cut could scare traders, while a too-weak signal might not satisfy market expectations.

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The S&P 500 rose 1.6%, the Nasdaq 100 climbed 2.8%, and a Bloomberg index of major tech companies jumped 3.1%. The Russell 2000 added 0.5%. Mastercard Inc. soared on profit gains, Boeing Co. rose after appointing a new CEO, and Humana Inc. warned of higher hospital admissions, indicating increased costs.

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Treasury yields fell, with the 10-year yield down three basis points to 4.11%. The U.S. Treasury maintained its quarterly issuance of longer-term debt, signaling no need for increased issuance for several quarters. The Bloomberg Dollar Spot Index dropped 0.4%. Oil prices spiked due to geopolitical tensions after Hamas announced Israel had killed its political leader. The yen strengthened as the Bank of Japan raised rates and cut bond purchases.

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Fed officials are expected to hint at a potential rate cut in September without committing to specifics. This announcement will come via a statement at 2 p.m. in Washington, followed by Powell’s press conference 30 minutes later. Brown Brothers Harriman & Co. analysts, Win Thin and Elias Haddad, predicted Powell might lean dovish but would not validate aggressive easing expectations.

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A survey by 22V Research revealed that 75% of investors expect the Fed to cut rates due to a soft landing and inflation trending toward a sub-3% target. This confidence in a soft landing has increased by 11% from the previous month. In addition, 44% of investors polled expect the Fed's meeting and press conference to have a mixed or negligible impact, 38% foresee a risk-on reaction, and 18% anticipate a risk-off outcome.

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Recent economic news showed U.S. labor costs grew slower than expected in the second quarter, with companies adding the fewest workers since the year's start and wage growth decelerating. Pending home sales also rose for the first time in three months. Bill Adams of Comerica Bank noted that the Fed could justify a rate cut based on current job market and inflation data but might hesitate to preserve its credibility after recent inflation overshoots.

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Investors face challenges as central bank policy meetings coincide with historically poor months for U.S. stock returns. Over the past three decades, the S&P 500 has averaged losses of 0.5% in August and 0.7% in September. This seasonal trend adds complexity as the Fed's signals on interest rates will be crucial once its meeting concludes.

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Despite these challenges, Solita Marcelli of UBS Global Wealth Management advised maintaining a full allocation to U.S. equities. She highlighted the potential of AI beneficiaries and other quality companies exposed to long-term trends like the energy transition, blue economy, and water scarcity, as key drivers of future growth.

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