Markets Surge as Fed Poised to Cut Rates Next Week

Wall Street closed at new all-time highs Thursday, driven by growing confidence that the Federal Reserve will deliver its first rate cut of the year next week. A modest inflation print and a sharp rise in jobless claims gave the Fed the cover it needs to shift focus toward a weakening labor market. The Dow topped 46,000 for the first time, while the S&P 500 and Nasdaq also extended their record-setting streaks. Treasury yields fell as markets priced in a more aggressive easing path, while gold briefly touched a record and small caps outperformed. Investors now expect a 25bp cut next week and are looking ahead to Powell’s press conference for clues on what’s next.

Key Headlines & Market Movers

• Inflation in Check, but Labor Market Cracks Widen: The latest CPI report showed core inflation rising a modest 0.3% month-over-month, with headline CPI at 0.4%. While still above target, the data suggests inflation isn't accelerating dangerously. However, initial jobless claims jumped to 263,000, the highest since 2021, underscoring a cooling jobs market that is increasingly taking center stage. This dual dynamic reinforces expectations for rate cuts, starting as soon as next week.
• Market Bets on Multiple Rate Cuts: Economists and traders now see the Fed cutting rates at all three remaining meetings in 2025. Fed funds futures show rising odds of successive 25bp cuts, with some even speculating on a 50bp move in September, though that’s seen as unlikely. The Fed’s dual mandate has clearly shifted toward supporting employment, and policymakers appear willing to tolerate elevated inflation for now to stave off economic weakness.
• Broad-Based Rally Led by Small Caps and AI Optimism: The rally was widespread. The Russell 2000 jumped nearly 2%, while mega-cap tech stocks were mixed. Tesla surged 6%, helping offset modest losses in Nvidia, Amazon, and Meta. Micron gained 7% on strong AI-related growth expectations, and Oracle gave back some of Wednesday’s massive gains. Meanwhile, the “AI trade” remains a key driver of tech optimism, even as valuations remain stretched.
• Corporate Activity Sparks Stock Moves: Warner Bros. Discovery shares soared 29% on reports of a potential takeover by Paramount Skydance. Opendoor surged 80% following a leadership shakeup, while Micron and Centene climbed on upbeat outlooks. On the M&A front, Citigroup’s CEO noted a rebound in dealmaking as policy clarity improves and recession fears fade. Elsewhere, Kroger, Infosys, and Delta all made headlines for forward-looking guidance and strategy shifts.

S&P 500 Sector Performance

Looking Ahead

All eyes turn to next week’s FOMC meeting. A 25bp cut is widely expected, but the bigger questions lie in the Fed’s updated dot plot and Powell’s tone at the press conference. Markets will be watching closely for signs of how deep the Fed may go and how it balances softening labor data against stubborn inflation. For now, momentum favors risk assets, but the path ahead will depend on whether the Fed can navigate the narrowing lane between supporting growth and managing price stability.

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