Markets Close Out Strong Quarter on AI Optimism, But Eyes Turn to Shutdown Risks

Stocks capped off a solid September and their second consecutive quarterly gain on Tuesday, buoyed by AI enthusiasm and lower rate expectations. The S&P 500 closed slightly higher, logging its best September in 15 years. However, momentum was subdued throughout the session as traders braced for a potential U.S. government shutdown, which could disrupt key economic data releases. Treasuries rose for a third straight quarter, while the dollar was little changed and oil extended recent losses.

Key Headlines & Market Movers

• Shutdown Looms as Data Risks Rise: Investors are growing increasingly concerned that a government shutdown will delay Friday's crucial nonfarm payrolls report, leaving the Fed with less visibility into labor and inflation trends. While a short shutdown may have minimal market impact, a prolonged event could spark volatility, particularly in sectors reliant on government contracts. Historically, longer shutdowns have weighed on stocks but supported bond prices. The lack of jobs data would also likely reinforce the Fed’s cautious stance, potentially locking in the expected 25 bps rate cut in October.

Labor Market Shows Signs of Cooling: The JOLTS report showed job openings were little changed in August, with hiring activity remaining subdued. Combined with a weaker-than-expected consumer confidence reading, the data adds to evidence that the labor market is losing steam. Several Fed officials acknowledged growing risks to employment, reinforcing expectations that the Fed may lean toward additional easing by year-end, depending on inflation trends.

• Fed Speakers Signal Diverging Risks: Fed Vice Chair Jefferson flagged growing downside risks to employment and upside risks to inflation, highlighting the challenge of balancing the dual mandate in a mixed-data environment. Boston’s Susan Collins echoed a cautious tone, suggesting more rate cuts may be needed if the labor market softens further. Meanwhile, Chicago’s Goolsbee warned that recent tariffs could delay business investment, potentially weighing on growth.
• Corporate Highlights: Pfizer, Nike, and More: Pfizer jumped nearly 7% after announcing major price cuts on several medications, avoiding looming pharmaceutical tariffs. Nike topped revenue expectations, signaling progress in its turnaround efforts. CoreWeave landed a $14B computing deal with Meta, reinforcing strong demand for AI infrastructure. In contrast, Firefly Aerospace plunged over 20% following a failed rocket test, and Spotify slipped 4% on leadership transition news.

S&P 500 Sector Performance

Looking Ahead

Markets enter October with solid momentum but face immediate uncertainty from the potential shutdown. If government operations stall, investors will need to navigate without key economic data, increasing reliance on corporate guidance and high-frequency indicators. Eyes will also remain on energy markets, Fed commentary, and geopolitical headlines as the next catalysts for direction.

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