S&P 500, Nasdaq set to end three-week gaining streak after turbulent stretch

The S&P 500 and Nasdaq are poised to end a three-week winning streak amidst investor apprehension over inflation and Federal Reserve policy. While August data showed consumer spending slightly up and inflation measured, analysts and Fed officials expressed low confidence in current forecasts due to the unquantified impact of tariffs, which are expected to drive corporate price increases by year-end. Further market uncertainty stems from mixed Fed signals on rate cuts and the potential for a government shutdown to disrupt key economic data.

Analysis

The S&P 500 and Nasdaq are poised to break a three-week winning streak, reflecting heightened investor uncertainty amidst a confluence of conflicting signals. While August data indicated a modest rise in consumer spending and measured inflation, market participants and Federal Reserve officials, such as Richmond Fed President Thomas Barkin, express low confidence in these figures, citing the yet-to-be-realized inflationary impact of tariffs. Strategists note that corporations, which have so far buffered tariff costs with existing inventory, are expected to implement price increases near year-end, making the upcoming earnings season a critical test for margin stability. This apprehension is compounded by mixed signals from Fed policymakers on the path of interest rate cuts and the growing risk of a U.S. government shutdown, which threatens to disrupt key economic data releases more extensively than in 2018-2019. Market performance shows a clear divergence, with the Dow Jones gaining on strength in financials and large-caps like Boeing (+4%), while the Nasdaq has retreated. Specific stocks are reacting to distinct policy catalysts, evidenced by Paccar's 5.1% gain on tariffs against imported trucks and GlobalFoundries' 8.7% jump on reports of a U.S. chip production rule, contrasting with Costco's 2.6% drop following its earnings report.

Key Decisions for Investors

• Given the mixed signals from the Fed and the looming threat of tariff-driven inflation, investors should prepare for increased market volatility and closely monitor upcoming central bank commentary for policy clarity.
• The upcoming earnings season is a critical catalyst; focus on corporate guidance regarding pricing power and margin outlooks, as the ability to pass on costs will be a key performance differentiator.
• Consider tilting portfolios towards companies with distinct policy tailwinds, such as domestic manufacturers like Paccar and semiconductor firms like GlobalFoundries, which are demonstrating relative strength due to specific tariff and onshoring-related news.
• The decline in Costco shares post-earnings and the downward revision of the University of Michigan consumer sentiment survey suggest investors should be cautious on consumer discretionary names that lack pricing power.