Stocks Bounce as Inflation Stays on Track, Consumers Keep Spending

Markets ended the week on a positive note, snapping a three-day losing streak as August’s core PCE inflation came in line with expectations. While the data confirmed inflation is still running above the Fed’s 2% target, it showed no signs of reacceleration, keeping the door open for additional rate cuts this year. Meanwhile, resilient consumer spending and income growth helped reinforce the soft-landing narrative. Stocks rose across the board, led by small caps and cyclicals, while bond yields were mixed and the dollar weakened modestly.

Key Headlines & Market Movers

• Inflation Meets Expectations, Keeping Fed Cuts on Track: August core PCE rose 0.2% month-over-month and held steady at 2.9% year-over-year. The numbers matched forecasts and marked the fourth consecutive monthly acceleration in headline PCE, though within a manageable range. Despite inflation remaining above target, the absence of a surprise provided relief to markets. Fed officials have recently emphasized labor market softness as a growing concern, suggesting they remain inclined to cut rates, possibly as soon as late October.
• Consumer Resilience Supports Growth Outlook: Personal spending rose more than expected in August, underscoring continued strength in household demand despite falling consumer sentiment. Income gains also held up, supporting the view that the U.S. consumer remains a key pillar of the economy. Economists now see upside risk to Q3 GDP growth, while corporate earnings are expected to remain firm if spending trends persist.
• Market Sentiment Turns Cautiously Bullish: After a strong September stretch and a brief pullback, investors returned to buying with Friday's rebound. Analysts note the market may be due for a pause given elevated valuations, but there's little sign of panic. With fiscal stimulus, a softer dollar, and potential Fed easing as tailwinds, dips may continue to attract buyers. The S&P 500’s forward P/E remains rich at 22.9, but bulls argue it’s justified by earnings resilience and macro stability.
• M&A Buzz and Tariff Headlines Drive Corporate Moves: Electronic Arts surged 15% on reports of a $50B private buyout deal, potentially the largest ever. Intel and GlobalFoundries extended their rally on news the Trump administration is weighing moves to boost domestic chipmaking. Meanwhile, tariffs on imported trucks and furniture caused sharp divergences: Paccar jumped 5% while RH fell over 4%. Drugmakers largely shrugged off proposed 100% tariffs on patented imports, anticipating carve-outs for domestic manufacturing.

S&P 500 Sector Performance

Looking Ahead

Markets will now turn to the September jobs report, though a possible government shutdown could delay its release. While shutdowns typically cause short-term volatility, they rarely have lasting market impact. October is historically volatile, but strong consumer fundamentals, improving rate cut odds, and resilient corporate earnings offer a cushion. If a pullback emerges, many analysts see it as a buying opportunity rather than a broader reversal.

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