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September typically punishes equity investors, but this year tells a different story. The S&P 500 closed Friday at 6,584.29, up 1.9% month-to-date. If this momentum holds, we'll see the second consecutive positive September, a streak not witnessed since 2017-2019.
The driving force isn't mysterious: a Federal Reserve poised to cut rates amid softening employment data and inflation that's warm but not alarming. Markets are pricing in policy relief just as economic data provides the justification for it.
Opening Bell
US equity futures are treading water ahead of a pivotal Fed week. As of this morning, the S&P 500 ($SPY ( ▼ 0.26% )) is up 0.1%, the Dow Jones ($DIA ( ▼ 0.53% )) adds 0.2%, while the Nasdaq 100 ($QQQ ( ▼ 0.38% )) is flat, reflecting cautious optimism as traders position themselves for Wednesday’s rate decision.
In fixed income, the 10-year Treasury yield is holding steady near 4.20%, pausing after last week’s rally as investors digest the recent drop in jobless claims and await further policy signals. Currency markets are modestly risk-off, with the US dollar firmer against the euro following France’s credit downgrade. The yen continues to weaken despite growing concerns about Japanese intervention.
In commodities, oil prices are nudging higher amid reports of refinery disruptions caused by Ukrainian drone strikes and renewed chatter around Russian energy sanctions. Gold is little changed as traders hesitate to make directional bets before the Fed’s announcement.
The data docket today features the New York Fed’s manufacturing survey, expected to slow to 5.0 from 11.9, a deceleration that would underscore the softening growth narrative and reinforce expectations of a dovish shift from the FOMC later this week.
The Fed's Moment: Why Wednesday Matters More Than You Think
Base Case: 25bp Cut with Dovish Tone
Fed funds futures show 96% probability of a quarter-point cut Wednesday. The more important question isn't the size but the message. Chair Powell faces a delicate balancing act: acknowledge labor market deterioration without triggering recession fears, while addressing inflation that remains above target.
The Communication Challenge
Recent data strengthens the Fed's case for easing. The BLS benchmark revision erased 911,000 jobs from the prior 12 months, a historic downward adjustment. Initial jobless claims spiked to 263,000, the highest since October 2021. Meanwhile, August CPI's 0.3% monthly increase, while above expectations, was driven largely by shelter and autos, categories potentially influenced by tariff pass-through rather than underlying demand pressure.
What Could Go Wrong
A hawkish-sounding cut represents the primary near-term risk. If Powell emphasizes inflation concerns over employment weakness, or sounds overly cautious about future cuts, markets could experience a classic "sell the news" reaction despite getting the rate cut they expect.
Historical Context
The only two September cuts following extended pauses (1998 and 2019) both preceded strong equity rallies. Both were "insurance" cuts rather than crisis responses, similar to today's environment where growth remains positive despite cooling momentum.
Corporate Spotlight: AI Infrastructure and Strategic Moves
Oracle's Breakout Moment
Oracle's ($ORCL ( ▲ 0.24% )) 36% surge following earnings reveals the AI infrastructure story's next chapter. The company projects over $450 billion in booked cloud revenue, with OpenAI reportedly as the dominant counterparty. This positions Oracle not just as a database company, but as the capacity provider enabling hyperscaler growth, a strategic moat that's clearly resonating with investors.
Tesla's Momentum and Musk's Bet
Tesla ($TSLA ( ▲ 0.09% )) shares gained additional momentum after CEO Elon Musk disclosed his largest-ever open market purchase: $1 billion worth of shares (2.57 million shares) on Friday. This represents his first significant purchase since February 2020 and signals confidence ahead of November's shareholder vote on his compensation package, which targets an ambitious $8.5 trillion market cap.
The technical picture supports near-term strength, with resistance likely around 407-408, then 420-425 which is something we called out a few weeks ago in the newsletter. However, fundamental headwinds remain: mixed 2025 demand signals, incentive roll-offs, and brand challenges tied to Musk's political activities.
Nvidia Faces Geopolitical Headwinds
China's market regulator announced preliminary findings that Nvidia ($NVDA ( ▼ 0.04% )) violated anti-monopoly laws, adding regulatory risk to the AI leader's investment thesis. While details remain sparse, this highlights the ongoing US-China tech tensions that could impact semiconductor names throughout the cutting cycle.
Market Structure: Strength with Caveats
Breadth Concerns Beneath the Surface
While headline indices post new highs, market breadth has deteriorated from recent peaks. Equal-weight performance lags cap-weighted indices, and fewer stocks are participating in the advance. This concentration risk doesn't invalidate the bullish case but suggests the rally's foundation could benefit from broader participation.
Small Caps: The Cutting Cycle Beneficiary
Small caps remain our preferred overweight into Fed easing. The Russell 2000 (IWM) has clear upside toward the 245 level, site of both 2021 and 2024 peaks. Historical precedent supports this view: small caps have consistently outperformed in the 12 months following initial rate cuts, particularly when cuts are preventative rather than reactive.
Sector Rotation Patterns
Early cutting cycle dynamics typically favor defensives initially, then rotate toward growth and cyclicals as policy transmission takes hold. Healthcare offers both defensive characteristics and growth exposure. REITs should benefit from cap rate compression as yields fall. Technology maintains structural leadership but requires more selective positioning after years of concentration.
Risk Management: What Could Derail This Setup
Three Scenarios to Monitor
Labor Market Acceleration: If jobless claims continue rising and job creation weakens further, the "soft landing" narrative could shift toward hard landing concerns.
Inflation Persistence: Core CPI holding at 3.1% year-over-year leaves little room for error. Another hot print could force the Fed to slow its easing pace.
Geopolitical Escalation: US-China tensions around technology and trade could create volatility spikes that challenge risk asset performance.
Technical Levels
Watch for S&P 500 support around 6,450-6,480 on any post-Fed disappointment. A break below 6,400 would signal broader technical damage and potentially trigger systematic selling from trend-following strategies.
Week Ahead: Key Catalysts
Wednesday: Fed Decision and Press Conference
Expected: 25bp cut
Key Focus: Powell's characterization of labor market weakness versus inflation persistence
Market Impact: Tone matters more than the cut size
Tuesday: Retail Sales
Consensus: Modest growth expected
Significance: Weak print reinforces cutting case; strong print wouldn't derail Fed but could limit dovish guidance
Breadth Confirmation
Watch for equal-weight indices and small caps to confirm any post-Fed strength
Credit spreads remain calm - widening alongside hawkish Fed tone would signal risk-off
Bottom Line: Positioning for Fed Week
This environment favors patience and selective opportunism. The combination of approaching Fed easing, resilient earnings, and AI infrastructure investment continues supporting risk assets, even as concentration and geopolitical risks require attention.
Core Holdings: Equal-weight S&P 500 exposure reduces mega-cap concentration while capturing expected breadth expansion. Small and mid-cap overweight into the cutting cycle, with healthcare providing defensive ballast.
Tactical Positions: Selective AI infrastructure exposure sized for event risk. REITs as direct rate beneficiaries. Core bonds and gold as portfolio insurance during any "sell the news" volatility.
Risk Controls: Use any post-Fed weakness to add exposure rather than chase current levels. Maintain defined stops around key technical levels, particularly for high-beta positions.
Final Thoughts
The real catalyst this week may be Powell’s words rather than the cut itself. A dovish 25bp move framed around employment would reinforce the rally’s foundation, though markets rarely give any Fed chair an easy ride when expectations run hot.
What makes this setup unusual is that September’s typical weakness has instead turned into anticipatory strength, fueled by the rare alignment of softening labor data and contained inflation. History adds weight here: when the Fed cuts with the S&P 500 sitting within 2% of record highs, the index has been higher a year later in 20 of 20 cases. Likewise, cuts spaced 5–12 months apart, nine months in this instance, have delivered gains in 10 of 11 occurrences, often with above-average returns. That backdrop favors risk assets, even if signs of narrowing breadth remind us this is a mature phase rather than a fresh one.
Oracle’s earnings surprise shows AI infrastructure demand is still robust, while Nvidia’s China issues underline how quickly geopolitics can shift sentiment. Smart money is leaning bullish but keeping dry powder for volatility. If history is any guide, patience will be rewarded, use post-announcement weakness as a chance to add quality exposure at better levels rather than chasing at the highs.
Dan Sheehan
This newsletter is for informational purposes only and should not be considered investment advice. Please consult with your financial advisor regarding your specific situation.
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