Market Commentary: Stocks Wobble as the Fed Gets Ready to Act

The economy is likely to remain hot through a new Federal Reserve hiking cycle, supporting corporate earnings and stocks despite increased volatility risks.

• Early-September equity weakness may remain contained because the S&P 500's rising 50-day moving average and early-June peak provided support, while defensive sectors such as REITs, utilities, and staples have not attracted the buying usually seen before a major downturn.
• Inflation is broader than energy: gasoline reached $4.31 per gallon and diesel $6.20, August headline CPI rose 0.4% month over month and 3.4% year over year, while core CPI increased at a 3.5% annualized pace and was up 2.4% year over year.
• The apparently moderate core CPI is flattered by shelter, which represents 42% of the core basket versus about 17% of core PCE; core PCE is expected to rise 0.28% month over month in August, equivalent to a 3.4% annualized rate, taking it to 3.1% year over year.
• Inflation is also accelerating in services and industrial inputs: 14 regularly used service categories rose 3.2% year over year versus 2.7% at the end of 2024, while semiconductor components rose 27% year over year and printed circuit board prices rose 139%.
• The market assigns an 86% probability to a rate hike at this week's meeting and prices roughly 3.7 hikes over the next year, which would lift the policy rate from 3.6% to about 4.5%; unemployment is 4.1% and nominal GDP growth exceeds 6%.

Takeaway: The authors now expect a new hiking cycle but believe strong nominal growth and the AI buildout can sustain revenues and profits; investors should nevertheless allow for more volatility and the risk that the Fed ultimately tightens further and for longer.