Stocks See Support Ahead of Wednesday's FOMC Decision

US equities are modestly higher ahead of the FOMC meeting, where markets widely anticipate a 25 basis point rate cut and are keen for signals on quantitative tightening, which could boost liquidity. This positive sentiment is further supported by a tentative US-China trade agreement averting new tariffs. While Q3 earnings season shows a high beat rate, overall profit and sales growth are decelerating, and economic data is mixed, with resilient housing and manufacturing contrasting with an ongoing government shutdown and new US-Canada trade tensions.

Analysis

Markets anticipate a 25 basis point rate cut at the upcoming FOMC meeting, with further easing expected to total 115 basis points by late 2026. Investors are keen for signals on quantitative tightening cessation, which would inject liquidity, especially given the absence of a Summary of Economic Projections. This monetary policy expectation is a primary market driver.

A tentative US-China trade agreement provides a positive catalyst, averting new tariffs and securing commitments on rare earth exports and soybean purchases. However, new US tariffs on Canadian imports introduce fresh trade friction, while the legality of existing reciprocal tariffs awaits a Supreme Court ruling by late 2025. These contrasting trade dynamics warrant close monitoring.

Q3 earnings season exhibits strong beat rates, with 84% of S&P 500 companies exceeding forecasts, the best since 2021. Despite this, aggregate profit and sales growth are decelerating to their smallest increases in two years. Economic data is mixed, showing stronger-than-expected housing and manufacturing, alongside resilient consumer confidence.

The protracted government shutdown, now in its fifth week, continues to obscure the economic outlook by delaying critical data releases. This situation could lead to increased unemployment and potentially reinforce the Federal Reserve's dovish stance. Its resolution is crucial for market stability and economic clarity.

Key Decisions for Investors

• Monitor the FOMC announcement and Chair Powell's press conference for any deviation from expected rate cuts and for clarity on quantitative tightening, as these will directly impact interest rate sensitive sectors and overall market liquidity.
• Assess the implications of the US-China trade agreement for specific companies and sectors, particularly those involved in technology and agriculture, while hedging against potential volatility from ongoing US-Canada trade disputes and the Supreme Court's tariff ruling.
• Scrutinize individual company earnings reports for quality of growth and forward guidance, given the decelerating aggregate profit and sales trends, and factor in the economic uncertainty stemming from the prolonged government shutdown.