On July 27, 2026, the US Commerce Department reported the June core personal consumption expenditures (PCE) price index rose 2.0% year-over-year, the lowest since early 2021, and just 0.1% month-over-month, both below expectations. The cooling of this key inflation gauge sharply boosted market expectations that the Fed would soon begin a rate-cutting cycle, driving all three major US stock indices to record highs.
Inflation Data Crushes Hawkish Doubts
The latest core PCE data not only approached the Fed's 2% long-term target but also showed inflation pressures were broadly easing. Meanwhile, the University of Michigan consumer sentiment index final reading rose to 72.6, above the initial reading, indicating consumers were turning more optimistic about the economic outlook. The Atlanta Fed's GDPNow model still expects the economy to grow over 2% in Q3, suggesting the US economy was achieving a soft landing.
After the data release, the CME's FedWatch Tool showed the probability of a 25-basis-point rate cut at the Fed's September meeting surged to 92% from 68% a week earlier, and the probability of a 50-basis-point cut rose to 18%. Markets widely expected Fed Chair Jerome Powell to deliver clear dovish signals at the Jackson Hole global central bank symposium next week.
Three Major Indices Break Records
Stimulated by rate cut expectations, the three major US stock indices opened higher and climbed throughout the day, all closing at record highs:
- Dow Jones Industrial Average rose 421.38 points, or 1.05%, to 40,568.27, breaking the previous high set in May 2024.
- S&P 500 rose 75.62 points, or 1.45%, to 5,310.43, a record closing high, with financials, technology, and consumer discretionary sectors all gaining.
- Nasdaq Composite rose 295.47 points, or 1.79%, to 16,780.15, bringing its year-to-date gain to over 17%.
Market volume surged 35% from the previous day, showing strong capital inflow.
Tech Giants Lead, AI Sector Regains Favor
Rate cut expectations directly benefited high-valuation tech stocks, with large tech firms all rising. Apple closed up 2.3%, returning its market cap above $4 trillion; Nvidia rose 3.1% after the company announced orders for its next-generation AI chip exceeded expectations; Microsoft gained 1.7% as its cloud business growth rebounded for two consecutive quarters. Amazon, Alphabet, and Meta all rose over 1.5%. The Philadelphia Semiconductor Index surged 2.8% to a record high.
Notably, the AI sector, which had recently retreated due to doubts about AI commercialisation, became active again. C3.ai jumped 8.9%, Palantir rose 6.4%, and market confidence in AI applications somewhat recovered. Analysts noted that a rate-cutting environment lowers financing costs, helping tech companies increase R&D investment, especially supporting AI startups still in their expansion phase.
Conditions for Rate Cut: Market Awaits Jackson Hole Signals
Despite the heightened rate cut expectations, recent Fed officials' comments remained cautious. Cleveland Fed President Loretta Mester said the core PCE decline was in line with expectations, but the labor market remained tight and wage inflation had not fully cooled, so she preferred to wait for more data before deciding. Markets are betting on a September rate cut, but two cuts totaling 50 basis points may occur before December.
Goldman Sachs economists revised their forecast in their latest report, expecting the Fed to cut rates by 25 basis points in September and December. They also noted that if inflation continues to undershoot the target, larger cuts could not be ruled out. BofA Merrill Lynch believed that rate cut expectations were mostly priced in, and US stocks might face a short-term pullback risk, advising investors to reduce positions on rallies.
Wall Street Debate: What Next After Record Highs?
With US stocks at historic highs, the bull-bear divide widened again. Bulls believed that a soft landing combined with ample liquidity would drive further valuation expansion, with the S&P 500 possibly reaching 5,500 by year-end. Morgan Stanley's chief strategist warned that market sentiment was overly optimistic and actual earnings growth could not support high valuations, recommending defensive sectors.
In terms of fund flows, US equity funds saw net inflows of $21.5 billion over the past week, with the tech sector receiving the largest share. However, high-yield bond spreads narrowed to historic lows, reflecting risk appetite near extreme levels. Geopolitically, the Middle East situation and Europe's energy crisis remained potential disruptors.
Investment Strategy Suggestions
For Asian and Southeast Asian investors, US stocks are at high levels, chasing gains carries high risk. Consider the following directions:
- Rate-sensitive sectors: such as REITs and utilities, which may benefit from a rate-cutting cycle.
- Tech leaders: Companies with high earnings certainty remain core holdings, but watch valuations.
- Safe-haven assets: Allocate appropriately to gold to hedge against inflation rebound or geopolitical risks.
Yarong Hongchao reminds investors that although the Fed policy shift expectation is strong, actual implementation is needed to sustain the trend. Be cautious of profit-taking in the short term, and seize the rate cut window in the medium to long term. We will continue to track the Jackson Hole meeting and subsequent economic data to provide timely analysis.