Dow Jones, S&P 500 Hit All-Time Highs as Rate Cut Rally Continues

Key points

• The Dow Jones and S&P 500 hit all-time highs last week.
• There were two key economic drivers that extended the post-rate cut rally.
• The focus this week is on Friday’s nonfarm payrolls report.

The major large-cap indices rose last week, but the Russell 2000 ended the week slightly lower. Will the momentum continue this week?

Major indices gained for the third consecutive week, with the Dow Jones and S&P 500 hitting all-time highs last week.

The Dow Jones gained 0.6% last week to finish at 42,313, an all-time closing high. The S&P 500 hit a record high last Thursday at 5,745, but then retreated slightly on Friday to close the week at 5,738, up 0.6% for the week.

Additionally, the Nasdaq Composite had the best week, rising 1% to 18,119. It was the third consecutive week of gains for these indexes, and the second in a row since the Federal Reserve cut interest rates on September 18. However, the Russell 2000 was down slightly last week, about 0.1% to 2,225. The week before, when the Fed cut rates, small caps gained 2.1%.

Let’s take a look at what drove the markets last week and what to expect this week.

Inflation falls to 2.2%

There were two major economic events that drove markets higher last week. One was the Gross Domestic Product (GDP) report, which showed the economy growing at a rate of 3%, up from previous reports of 2.8% growth. The upward revision was due to higher federal government spending and a larger investment in private inventories than originally anticipated.

The second catalyst was the Personal Consumption Expenditures (PCE) report for August, which showed inflation fell to 2.2%, from 2.5% in July. The PCE, which is the Fed’s preferred indicator for tracking price movements, was better than the 2.3% rate economists had expected. At 2.2%, the inflation rate is the lowest since February 2021 and is close to the Fed’s goal of 2% annual inflation.

Both reports were good news for markets, but the news had already been largely discounted. The decline in the PCE was similar to the decline in the Consumer Price Index (CPI) a few weeks earlier and, since the Fed had already cut interest rates, it did not cause much movement in the markets. Furthermore, although the GDP revision was positive, economic growth had already been discounted after the initial second quarter GDP was released.

Employment report this week

Markets were reeling on Monday, the last day of the third quarter. In the morning session, the major indices were slightly lower, with the Dow Jones losing 100 points (-0.2%), the Nasdaq down 40 points (-0.2%) and the S&P 500 down 10 points (-0.2%). The Russell 2000 rose about 6 points on Monday, or 0.3%.

Third-quarter earnings season begins next week, but there are some notable names reporting this week, particularly Nike (NYSE: NKE), which recently replaced its CEO, Paychex (NASDAQ: PAYX) and spice company McCormick ( NYSE: MKC) on Tuesday.

Food company Conagra (NYSE: CAG) reports on Wednesday, while Levi Strauss (NYSE: LEVI) reports on Wednesday, and food company Constellation Brands (NYSE: STZ) reports on Thursday.

Investors will be watching the nonfarm payrolls, or unemployment, report on Friday. With inflation close to its target range, the other part of the Fed’s dual mandate, maximum employment, comes into focus. Markets could move on Friday, depending on the results of the nonfarm payrolls report.

Economists are predicting 144,000 new jobs and an unemployment rate of 4.2% in September, the same as in August.