Stocks Hit Record Highs as Soft Inflation Data Cements Fed Rate Cut Bets

Markets rallied to fresh highs Friday as a cooler-than-expected inflation report gave investors more confidence in the Fed’s path toward rate cuts. The S&P 500 and Nasdaq hit new records, fueled by optimism around easing policy, resilient corporate earnings, and receding inflation fears. Treasury yields were mixed, the dollar was flat, and oil and gold edged lower after sharp moves earlier in the week. Traders now fully expect a rate cut next week, with growing expectations for more into 2026.

Key Headlines & Market Movers

• Inflation Miss Fuels Rate Cut Optimism: September's core CPI rose 0.2% month-over-month and 3.0% annually, just below expectations. This marks the slowest pace in three months and reinforces the view that inflation, while still above the Fed’s target, is gradually fading. Markets are now pricing in not just a rate cut next week but another in December, as the Fed’s focus appears to shift more toward supporting the labor market. Traders now expect as much as 120bps of easing over the next 12 months.

Fed Poised to End QT, Markets Watching Closely: In addition to rate cuts, there's growing speculation the Fed may announce an end to quantitative tightening (QT) as early as next week. Signals from money markets and commentary from JPMorgan suggest balance sheet runoff may be halted soon, adding another layer of support for liquidity-sensitive assets. Markets will be watching for any such shift in next week's Fed statement and press conference.

• Earnings Continue to Support Rally: Earnings season is reinforcing the bull case. Intel returned to profitability and gave an upbeat forecast, Ford bounced back from earlier supply disruptions, and P&G beat expectations while downplaying tariff risks. On the downside, Deckers and Newmont disappointed, but the broader takeaway is one of resilient corporate profitability. Continued strength in earnings is helping justify elevated equity valuations.
• Tech & Crypto Strength Boost Risk Sentiment: Tech outperformed, led by a surge in AMD after news it may support IBM’s quantum computing efforts. IBM jumped 8% and helped lift the Dow. Crypto markets also saw solid gains, Bitcoin rose to over $110K and Ether climbed 2.5%, as JPMorgan announced plans to accept crypto assets as loan collateral, a further sign of mainstream integration.

S&P 500 Sector Performance

Looking Ahead

With the Fed meeting next week, markets will focus on forward guidance more than the expected 25bp rate cut. Watch for any indication on the end of QT and the tone around further cuts in December and early 2026. Absent government inflation data for October, markets may lean more heavily on earnings and private indicators to gauge macro trends. For now, with inflation softening, earnings holding up, and liquidity conditions likely to improve, the rally has strong near-term momentum.

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