Wall Street at New Highs Amid Dovish FOMC Mins

Major US indices and gold (XAU) rallied to session highs on Wednesday, 8 October, after the September FOMC minutes suggested a more dovish Federal Reserve. The S&P500 and Nasdaq hit new record highs, while the Dow Jones ended the session flat amid the US government shutdown. However, momentum remains bound to tech and growth stocks, with the AI trade largely dependent on earnings momentum. 

Heading into the end of this week with no economic data releases, eyes are fixed on whether bullish momentum can stick around, given that a significant minority of seven policymakers voted for no further rate cuts in 2025. Notably, the odds of a cut in October increased to 95%, although December saw a reduction of less than 80%.

TL;DR

• Wall Street hit fresh records after the Fed minutes signalled more rate cuts amid expectations of strong tech earnings in Q3.

• Dovish FOMC minutes drove risk appetite higher, especially in AI and tech stocks.

• Odds for an October rate cut approach 95%, supporting bullish sentiment alongside record-breaking gold prices.

• Rally risks include high valuations, policy debates, and government data gaps due to the prolonged shutdown.

• Traders should watch Fed speakers, sector concentration, and tech earnings for short- and medium-term momentum.

FOMC Doves Drive New Record Highs

The Fed’s minutes of the September interest rate decision showed a growing consensus among US policymakers to further cut rates this year, suggesting at least one more rate cut at the upcoming meeting on 29 October. Despite heading into the next meeting blind, the Fed did signal that risks to employment justify a more accommodative stance and even admitted that the labour market may have been weaker for longer than previously thought. The minutes said, “Participants indicated that their outlooks for the labour market were uncertain and viewed downside risks to employment as having increased over the inter-meeting period.”

Wall Street’s risk appetite returned after the release of the FOMC minutes and a temporary sell-off on Tuesday, driven by concerns about AI spending, also shared by the Bank of England (BOE). Investors piled into Nvidia (NVDA), Advanced Micro Devices (AMD), Super Micro Computer (SMCI), and Oracle (ORCL) as AI-led optimism returned. Overall earnings and revenue in Q3 are expected to grow by 8% and 6.3%, respectively. With 81% of tech stocks now anticipating higher earnings, the expectation is for 21% growth, up from 16% in June. Gold continued its record rally, too, supported by the prospects of rate cuts and its allure as a hedge. However, while the minutes signalled further cuts, some officials expressed cautiousness. (Source: Reuters)

Can the Rally to Record Highs Continue?

Although the AI rally largely “remains intact” and could continue according to JPMorgan (JPM), with multi-billion-dollar investments expected to enter the space, "a majority of participants emphasised upside risks to their outlooks for inflation.” On the one hand, market participants have set expectations for two rate cuts following updated projections at the last Fed meeting. On the other hand, the minutes indicated a brewing debate amongst policymakers at the Fed, with 19 expecting two cuts and 7 no cuts at all. 

With the rally highly dependent on earnings expectations and the absence of major economic data, it may be unlikely that the Fed's views will change. Similarly, the current bullish market interpretation of lower interest rate expectations is unlikely to change without new government data, with traders seeing an 78% chance of a 50-basis-point reduction through year-end. Notably, the futures markets agree, with 44 basis points expected by year-end, with Citi (C) going as far as to forecast a rate cut at each of the next four Fed meetings. However, Oppenheimer and Goldman Sachs (GS) are worried about a bubble.

What Traders Need to Watch

Oppenheimer recently warned of high valuations and leverage risks leading to a bubble amid rising concerns about AI deals involving high concentrations in Big Tech. GS also said that markets could correct if confidence in earnings growth deteriorates. However, both argued that the current rally is driven by fundamental growth rather than speculation and is not close to reaching a top. Yet, Goldman expressed fears about investors crowding into a highly competitive and concentrated AI space, which led to bubble bursts in the past.

In the short term, with the Senate failing to pass a funding bill for the sixth time, the shutdown entering its ninth day on Thursday, the risks of a potential correction increase as the shutdown drags on. For now, US equities have been little impacted by the US government shutdown as it heads into its second week. As jobs are likely to be affected by the shutdown, the Fed's focus may shift even more to the labour market than before, with the most significant question being whether the Fed decides to cut at its next meeting without having all the data inputs.

*Past performance does not indicate future results. The above are only projections and should not be taken as investment advice.