Stocks See Support Ahead of Wednesday's FOMC Decision

US equities are trading marginally higher as markets anticipate a 25 basis point Fed rate cut this week, with further easing expected, and look for updates on Quantitative Tightening. This positive sentiment is bolstered by a tentative US-China trade agreement, which includes the removal of tariff threats and specific concessions, alongside stronger-than-expected housing and manufacturing data. While Q3 earnings season shows 84% of S&P 500 companies beating forecasts, growth rates are decelerating, with major tech firms reporting this week. However, an ongoing US government shutdown and new US tariffs on Canadian imports introduce headwinds, while the Supreme Court is set to review the legality of reciprocal tariffs.

Analysis

US equities are marginally higher, primarily driven by strong market expectations for a 25 basis point FOMC rate cut this week, with a 98% probability, and a subsequent cut in December. This anticipated easing, totaling 115 basis points by end-2026, is reinforced by better-than-expected August FHFA US house price index (+0.4% m/m) and October Richmond Fed manufacturing index (-4). The absence of an FOMC Summary of Economic Projections, however, limits forward guidance beyond Chair Powell's press conference.

A tentative US-China trade agreement, removing the 100% tariff threat and securing China's rare earth commitment, provides a positive geopolitical catalyst. Concurrently, Q3 earnings season shows 84% of S&P 500 companies beating forecasts, though overall profit growth at +7.2% year-over-year is the smallest in two years. Notable individual movers include Microsoft (+2%) on its OpenAI stake and PayPal (+10%) due to ChatGPT integration.

Despite these positive factors, an ongoing US government shutdown, now in its fifth week, introduces significant economic uncertainty by delaying data and potentially increasing unemployment. Additionally, new US tariffs on Canadian imports and the impending Supreme Court review of reciprocal tariffs by late 2025 or early 2026 add further geopolitical and legal risks, contributing to the overall cautious market tone.

Key Decisions for Investors

• Investors should closely monitor the FOMC statement and Chair Powell's press conference for any deviations from the expected 25 bp rate cut and for hints regarding the future pace of easing and Quantitative Tightening.
• While Q3 earnings beats are high, investors should scrutinize the decelerating profit and sales growth trends, particularly for the Magnificent Seven reporting this week, to gauge underlying corporate health.
• Consider the implications of the US-China trade agreement as a positive, but remain vigilant on US-Canada trade tensions and the potential market impact of the Supreme Court's ruling on reciprocal tariffs.
• Account for the economic drag and data uncertainty caused by the prolonged US government shutdown, which could influence Fed policy and broader market sentiment.