Written by Linh Tran, Market Analyst at XS.com

After a modest 0.05% dip last Friday, the S&P 500 regained traction this week, climbing 0.47%. The rally was largely driven by technology and communication stocks, supported by persistent expectations of a 25 bps Fed rate cut at the September 18 meeting. However, investor flows remained selective, with energy and financials moving in line with yield and oil price fluctuations.

Macroeconomic data from last week painted a mixed picture. CPI m/m rose 0.4%, surpassing both forecasts (0.3%) and the previous reading (0.2%), pushing CPI y/y to 2.9% from 2.7% — a sign that consumer inflation remains stubborn. Conversely, PPI m/m fell 0.1%, pointing to easing input costs and potential margin relief for businesses. Retail Sales data showed resilience in core spending but weakness in the headline figure, reflecting uneven consumer strength. Meanwhile, the Michigan Consumer Sentiment Index slumped to 55.4, well below expectations, even as jobless claims improved to 245k (versus 263k expected), indicating continued labor market resilience.

Taken together, these data points strengthened market expectations of a 25 bps Fed rate cut, while also underscoring the risk of sticky inflation — a factor that may prompt a more measured policy tone.

For U.S. equities, the Fed’s messaging may prove just as crucial as the cut itself. A dovish 25 bps reduction, paired with signals of a sustained easing cycle, would likely support higher valuations, particularly in duration-sensitive sectors such as tech, communications, and software. On the other hand, a “data-dependent” or hawkish stance could keep real yields elevated, limit valuation expansion, and keep the S&P 500 trading sideways with narrow market breadth.

From a corporate fundamentals perspective, inflation’s push-and-pull effect is evident: softer PPI supports input costs and gross margins, but elevated CPI implies persistent wage and service cost pressures, constraining pricing power. Consumption trends remain supported by a robust labor market, helping defensive sectors and core retail, while cyclical industries such as industrials and materials continue to struggle with high funding costs and weaker external demand.

An easing environment typically favors growth-oriented sectors (technology, communications, IT services) and long-duration business models. Financials’ performance will depend on the yield curve — a steeper curve could boost net interest margins, while persistently high real yields may cap valuations. Energy remains tied to oil price volatility, with geopolitical risks (e.g., Russia–NATO drone incidents and Middle East tensions) posing the risk of short-term price spikes, though longer-term sustainability will depend on global demand trends.

Geopolitical uncertainty is an increasingly important market factor. Russian drone incursions into NATO airspace and escalating tensions in the Middle East following Israeli strikes in Qatar are keeping risk sentiment fragile. These developments often trigger brief risk-off phases, increase sector dispersion, and boost demand for safe-haven assets — potentially amplifying volatility around the Fed’s upcoming decision.

In summary, the S&P 500’s near-term direction hinges on the Fed’s policy decision and guidance. Three scenarios stand out:

• Clearly dovish: A 25 bps cut with a supportive message could allow the index to extend its upward momentum.

• Cautious easing: A cut accompanied by a “wait-and-see” tone may leave the index range-bound until further data — particularly cooling core inflation — confirms a softer trend.

• Hawkish surprise/no cut: Would likely push the USD higher and weigh on equities, especially cyclicals and rate-sensitive names. This outcome, however, remains unlikely.

Overall, the near-term outlook for the S&P 500 is cautiously constructive. Market participants are waiting for confirmation of the Fed’s easing trajectory before committing to a sustained rally, with internal sector rotation — led by technology and defensive plays — expected to continue in the meantime.