Stocks See Support Ahead of Wednesday's FOMC Decision

US equities rose Tuesday, buoyed by strong expectations for a dovish FOMC outcome, including a 25 basis point rate cut and the cessation of quantitative tightening, which would inject liquidity. Market sentiment was further supported by a tentative US-China trade agreement averting new tariffs, better-than-expected housing and manufacturing data, and robust consumer confidence. This pivotal week also features earnings from five 'Magnificent Seven' companies, with Q3 results generally exceeding forecasts despite a projected slowdown in overall profit and sales growth, while the ongoing government shutdown continues to impact economic data releases.

Analysis

US equities experienced broad gains on Tuesday, with the S&P 500 rising +0.23%, the Dow +0.34%, and the Nasdaq 100 +0.74%. This positive momentum was largely driven by strong expectations for a dovish FOMC outcome, including a 25 basis point rate cut to 3.75%-4.00% and the cessation of quantitative tightening, alongside a tentative US-China trade agreement that averted new tariffs. The trade deal specifically removed the threat of a 100% tariff and secured China's commitment on rare earth exports and US soybean purchases.

Further market support stemmed from a decline in the 10-year T-note yield and better-than-expected economic data, including a +0.4% m/m rise in the Aug FHFA US house price index and an improved Oct Richmond Fed manufacturing index of -4. Q3 earnings season is progressing strongly, with 84% of S&P 500 companies beating forecasts, marking the best quarter since 2021. However, overall Q3 profit growth is projected to be the smallest in two years at +7.2% y/y, with sales growth slowing to +5.9% y/y.

Despite positive sentiment, several risks persist, including the ongoing fifth-week US government shutdown, which is delaying critical economic reports and could impact employment. New trade tensions with Canada emerged following President Trump's proposed 10% tariff, with the legality of reciprocal tariffs awaiting a Supreme Court hearing on November 5. Individual stock performance was notable, with Nvidia (+5%) and Microsoft (+2%) gaining on AI news, while Alphabet declined -0.50%.

Key Decisions for Investors

• Monitor the FOMC announcement closely for confirmation of the 25 basis point rate cut and the end of quantitative tightening, as this will significantly impact market liquidity and interest rate expectations.
• Scrutinize individual company earnings reports, particularly from the 'Magnificent Seven,' focusing on forward guidance given the projected slowdown in overall Q3 profit and sales growth despite strong beat rates.
• Track developments in US-Canada trade relations and the Supreme Court's ruling on reciprocal tariffs, as these carry significant market implications beyond the tentative US-China agreement.
• Assess the potential economic impact of the ongoing government shutdown, particularly its effect on delayed economic data releases and broader market sentiment.