Stock market today: Dow, S&P 500, Nasdaq slide on inflation worries, ending 4th winning month lower

US equities retreated from record highs on Friday, led by the Nasdaq's 1.1% decline, as markets processed July's core Personal Consumption Expenditures (PCE) index, which rose 0.3% monthly and 2.9% annually, exceeding the Fed's 2% target but aligning with expectations. This data, coupled with a three-month low in consumer sentiment, prompted the daily pullback, yet major indexes still capped August with their fourth or fifth consecutive monthly gains. Despite the firming inflation, traders maintained an 87% probability of a Fed rate cut in September.

Analysis

US equities pulled back from record highs on Friday, reacting to July's core Personal Consumption Expenditures (PCE) index which, while matching expectations, affirmed persistent inflationary pressure. The index rose 0.3% monthly and 2.9% annually, the fastest yearly pace since February and well above the Federal Reserve's 2% target. This data, combined with a decline in consumer sentiment to a three-month low, triggered a risk-off session, with the tech-heavy Nasdaq Composite (^IXIC) leading declines at over 1.1%, and bellwether Nvidia (NVDA) falling more than 3%. Despite the daily retreat, the underlying market momentum remains robust; the S&P 500 and Dow Jones Industrial Average secured their fourth straight month of gains in August, rising 1.4% and 2% respectively, while the Nasdaq marked its fifth consecutive winning month with a 1.6% increase. Notably, small-cap stocks, represented by the Russell 2000 (^RUT), were on track for a significant 6% monthly jump. A key market dichotomy persists, as traders continue to price in an 87% probability of a Fed rate cut in September, suggesting investors are largely looking past the current inflation figures in anticipation of monetary easing.

Key Decisions for Investors

• Monitor Fed communications and forward-looking economic data with heightened scrutiny, as the market's prevailing optimism is heavily priced for a September rate cut, creating a vulnerability to any hawkish pivot from the central bank.
• Consider the divergence in performance between sectors, noting the relative strength and 6% monthly gain in small-caps versus the profit-taking seen in mega-cap tech, which could signal a broadening of market leadership.
• Evaluate positions in high-valuation technology stocks like Nvidia, as its 3% post-earnings decline may indicate a 'sell-the-news' reaction and an increased risk of near-term consolidation after a strong run.