Stocks Soar as Investors Anticipate Fed's Next Move

U.S. stocks closed out their best week of the year with more gains on Friday, climbing to the cusp of their records. The S&P 500 rose 0.5% for a fifth straight gain, just 0.7% below its all-time high set in July. Rallies for Microsoft, Broadcom, and other big technology stocks helped it claw back almost all its losses from last week, which was its worst in nearly 18 months.

Investors Eagerly Await the Fed's Decision

Stocks Surge on Hopes for Significant Rate Cut

U.S. stocks have risen to the brink of their all-time highs, buoyed by growing expectations of a substantial interest rate cut from the Federal Reserve next week. The S&P 500 index climbed 0.5% on Friday, just 0.7% shy of its record high set in July, as investors bet on the central bank delivering a more aggressive monetary policy easing than previously anticipated.The Dow Jones Industrial Average jumped 297 points, or 0.7%, trading close to its own record high. The Nasdaq composite also added 0.7%, as technology stocks like Microsoft and Broadcom led the charge. Investors are increasingly hopeful that the Fed will cut rates by a larger-than-expected half-percentage point, rather than the more typical quarter-point reduction.This optimism stems from the bond market, where Treasury yields have eased ahead of the Fed's policy meeting next week. The two-year yield, which closely tracks expectations for Fed action, fell sharply to 3.58% from 3.65%, signaling that traders are pricing in a more dovish stance from the central bank.

The Fed's Delicate Balancing Act

The Federal Reserve has been keeping its main interest rate at a two-decade high in an effort to slow the economy and tame high inflation. However, with inflation having eased substantially from its peak two summers ago, the central bank has indicated that it can now turn more focus to bolstering the slowing job market and economy.The upcoming rate cut will be a delicate balancing act for the Fed. Lowering rates can provide relief to the economy, but it also risks fueling further inflationary pressures. Reports earlier this week showed some underlying upward pressure may remain on inflation, initially pushing traders to scale back expectations for the size of the Fed's upcoming move.However, on Friday, traders were seeing roughly a coin flip's chance that the Fed could deliver a large cut of half a percentage point, instead of the more traditional quarter-point reduction. This reflects the central bank's challenge in navigating the current economic landscape, as it seeks to support growth without reigniting inflation.

Sectors and Stocks React to the Fed's Anticipated Move

The anticipation of the Fed's rate cut has had a significant impact on various sectors and individual stocks. Technology stocks, in particular, have been the market's main drivers this week, with Nvidia and other big tech companies rallying strongly after struggling earlier in the summer due to concerns about their valuations.Elsewhere, home-furnishings company RH jumped 25.5% after reporting stronger-than-expected profit and revenue for the latest quarter. The company noted that demand has been gaining momentum each month "despite operating in the most challenging housing market in three decades." This suggests that some sectors may be weathering the economic headwinds better than others.On the other hand, Boeing lost 3.7% as aircraft assembly workers walked off the job, with union members voting overwhelmingly to go on strike and reject the troubled aerospace giant's tentative contract. This highlights the ongoing challenges facing certain industries and companies, even as the broader market rallies.Overall, the anticipation of the Fed's rate cut has been a significant driver of the market's recent gains, with investors eagerly awaiting the central bank's decision and the potential impact on the economy and individual stocks.