Introduction to the Market
Corporate America just entered earnings season for the quarter ended Sept. 30. Toward the end of October, some of the most influential companies in areas like artificial intelligence will give investors an update on their progress, which could determine the direction of the entire market for the remainder of 2025.
The Importance of the Federal Reserve Meeting
However, on Oct. 29, the U.S. Federal Reserve will conclude a two-day policy meeting where it’s widely expected to deliver an interest rate cut. The economy is at a crossroads with sticky inflation and a rising unemployment rate, so the central bank’s decision — and subsequent commentary from Chairman Jerome Powell — could be just as important as the imminent wave of corporate earnings.
Key Points to Consider
- Wall Street will digest a tidal wave of corporate earnings from some of America’s most influential companies over the next few weeks.
- The Federal Reserve’s upcoming two-day policy meeting on Oct. 28 and 29 could be even more important for the market.
- The Fed is expected to cut interest rates, which could be good for the market long term but could spark some short-term jitters.
The Fed’s Dual Mandate
The Fed has two primary objectives as mandated by law:
- Maintain Price Stability: This means keeping the Consumer Price Index (CPI) measure of inflation increasing at a rate of around 2% per year.
- Maintain Full Employment: This means creating an environment that supports job creation, although the Fed doesn’t have a specific target for the unemployment rate.
The Current Economic Situation
The latest CPI reading from August showed that inflation is increasing at an annualized rate of 2.9%. That is far closer to the Fed’s 2% target than it was back in 2022, when it soared to a 40-year high of 8%. However, 2.9% marked the highest reading of 2025 so far, rising considerably from the April low point of 2.3%. The U.S. economy added 73,000 new jobs in July, which was far below the 110,000 economists had forecast. In that very same non-farm payrolls report, the Bureau of Labor Statistics also revised the May and June numbers down by a combined 258,000 jobs, implying the economy is much weaker than initially thought.
An October Cut Appears Almost Certain
The CME Group created a tool called FedWatch, which analyzes trading activity in the 30-Day Fed Funds futures contracts to calculate the probability of interest rate cuts. It currently implies there is a 95% chance of a rate cut in October, followed by a 94% chance of a December cut. Policymakers on the Federal Open Market Committee seem to agree, because the Fed’s latest Summary of Economic Projections report, which was released in September, showed it expects to cut interest rates two more times by the end of the year.
Impact of Interest Rate Cuts
Falling interest rates allow businesses to take on more debt, which can help them grow and expand. Lower rates also reduce interest costs, which is a tailwind for corporate earnings. Since the stock market typically trends higher on the back of growing corporate earnings, we can conclude that lower interest rates are positive for the S&P 500 in the long run. However, investors don’t want to see the Fed slashing interest rates because the economy is overly weak. If the unemployment rate continues to tick higher, consumer spending could slow significantly, which would dent corporate earnings, potentially sending the S&P 500 lower in the short term.
Conclusion
The S&P 500 has recovered from even the worst economic events, whether it be the pandemic, the global financial crisis in 2008, or the dot-com crash in 2000. Therefore, investors might want to use any weakness as a buying opportunity for the long term. It’s essential to consider the broader market trends and economic indicators when making investment decisions. While the Fed’s interest rate cuts can have a positive impact on the market in the long run, the current economic situation and rising unemployment rate may cause short-term jitters. As such, it’s crucial for investors to stay informed and adapt their strategies accordingly.
