Markets Brace for PCE data

Good Morning Investors,

Markets face a critical final session of what has been a challenging week, with the S&P 500 down 0.9% and the Nasdaq retreating 1.1% through Thursday's close, marking the anticipated consolidation phase I've consistently forecasted. Today's PCE inflation data becomes the critical catalyst that could either extend this healthy pullback or provide the foundation for recovery into the final quarter ahead of what I expect will be strong bank earnings.

Futures for the S&P 500 ($SPY ( ▲ 1.92% )) and the Nasdaq ($QQQ ( ▲ 2.11% )) trade near flat as investors await the Fed's preferred inflation gauge, with economists expecting core PCE to remain sticky at 2.9% year-over-year. This data arrives after Thursday's surprisingly robust GDP revision to 3.8% and declining jobless claims. This economic strength paradoxically pressures risk assets by reducing Fed accommodation urgency.

The week's 0.9% S&P decline represents exactly the type of consolidation I anticipated following the initial rate cut, creating the strategic positioning opportunities that patient capital can exploit heading into the final quarter.

Thursday's GDP revision to 3.8% from 3.3% demonstrates remarkable economic durability, driven by consumer spending that validates my thesis about wealth effect sustainability. However, this strength, combined with declining jobless claims to 231,000, creates the "good news is bad news" dynamic that pressures rate cut expectations.

The growing Fed division reflects this complexity. Chicago Fed President Goolsbee's stagflation concerns contrast sharply with Governor Miran's aggressive cutting advocacy, though JPMorgan's pointed critique of Miran's positions suggests his influence remains limited. The FOMC appears increasingly data-dependent rather than committed to aggressive accommodation.

Today's PCE reading becomes crucial. Expectations for core inflation to hold at 2.9% versus the Fed's 2% target could further moderate cutting expectations, extending near-term volatility while maintaining medium-term accommodation prospects.

President Trump's announcement of 100% tariffs on branded pharmaceuticals and 25% levies on heavy trucks represents the most aggressive trade policy escalation since taking office. The pharmaceutical tariffs, effective October 1st, create immediate sector-specific risks while advancing domestic manufacturing incentives.

Costco's Thursday earnings call provided early insights into tariff management strategies. CFO Millerchip highlighted the company's approach: introducing Kirkland Signature alternatives for tariff-affected goods, shifting toward domestic sourcing, and emphasizing categories with lower tariff exposure. This operational adaptation demonstrates how quality companies navigate policy uncertainty.

The pharmaceutical sector faces particular pressure, with companies like Eli Lilly and Johnson & Johnson already announcing significant U.S. manufacturing investments. However, the complexity of global pharmaceutical supply chains makes immediate reshoring challenging, creating near-term margin pressure that could extend beyond 2025.

Intel's ($INTC ( ▲ 4.87% )) 9% Thursday surge following Apple ($AAPL ( ▲ 0.8% )) partnership reports exemplifies how strategic positioning trumps traditional valuation metrics in the current environment. The potential Apple investment, combined with existing Nvidia ($NVDA ( ▲ 7.87% )), SoftBank, and government stakes, transforms Intel from distressed semiconductor play to strategic national asset.

This dealmaking approach of securing partnerships with Nvidia for AI infrastructure, potential Apple collaboration, and government backing, demonstrates how companies can leverage geopolitical positioning for competitive advantage. Intel's 70% year-to-date gain reflects this transformation from pure technology investment to strategic sovereignty play.

The government's 10% stake fundamentally alters Intel's risk profile, providing implicit support while advancing domestic semiconductor objectives. This model may extend to other strategic industries, creating investment themes beyond traditional fundamentals.

Costco's ($COST ( ▲ 1.2% )) quarterly beat, $5.87 EPS versus $5.80 expected on $86.16 billion revenue, demonstrates consumer behavior adaptation during inflationary periods. The 14% membership fee income growth, driven by both higher fees and membership upgrades, validates the pricing power of essential service models.

Management's commentary about offsetting tariff costs through private-label alternatives and domestic sourcing provides a playbook for navigating trade policy uncertainty. The company's ability to maintain traffic growth while expanding transaction sizes suggests consumer resilience among its membership base.

However, the deceleration in same-store sales growth to 6.4% from higher recent levels indicates moderate normalization, consistent with broader consumer spending trends.

Oracle's ($ORCL ( ▲ 4.65% )) fourth consecutive day of declines, extending weekly losses to 5.6%, reflects healthy skepticism about AI infrastructure valuations following the recent rally. The broader AI sector reassessment, affecting Meta, Tesla, and other momentum names, creates opportunities to differentiate between structural leaders and speculative participants.

This rotation away from pure AI plays toward companies with operational excellence and diversified revenue streams aligns with my consistent preference for quality over momentum during uncertain periods.

The current pullback fits my expected pattern of weakness to end September and begin October, creating positioning opportunities ahead of bank earnings season. Financial sector earnings should demonstrate the operational excellence and net interest margin stability that justify current valuations.

Banks benefit from both higher rate environment persistence and eventual cutting cycle accommodation, creating favorable conditions regardless of Fed policy timing. The sector's strong capital positions and robust buyback programs provide technical support during volatility.

I maintain my 6,800 S&P 500 year-end target while using any weakness strategically. The combination of economic resilience, corporate earnings strength, and eventual Fed accommodation supports medium-term optimism despite near-term consolidation.

Focus continues on companies demonstrating pricing power, operational flexibility, and domestic exposure benefits. The current environment rewards fundamental strength over speculative positioning.

Potential government shutdown concerns add tactical uncertainty without undermining fundamental investment themes. Historical precedent suggests these events create temporary volatility that patient capital can exploit rather than lasting economic impact.

This week's pullback validates my expectation for healthy consolidation following the Fed's initial accommodation. Today's PCE data provides critical insights into inflation persistence that will shape October Fed expectations and market positioning.

The combination of economic strength, corporate adaptation to policy uncertainty, and strategic government investments creates a complex but ultimately constructive environment for risk assets. Use current weakness to position for what should prove a strong finish to 2025.

Bank earnings season will demonstrate whether current valuations reflect sustainable operational excellence or require further adjustment. My expectation remains that financial sector strength will catalyze broader market recovery into year-end.

Dan Sheehan

[email protected]

This newsletter is for informational purposes only and should not be considered investment advice. Please consult with your financial advisor regarding your specific situation.