Stocks keep hitting record highs. The Fed’s decision and Big Tech earnings are crucial in keeping them there.
It’s hard to overstate just how crucial Wednesday could be for the stock market in its final leg of this year.
Major U.S. equity indexes already zoomed to fresh record highs this week ahead of the Federal Reserve’s expected decision to cut rates on Wednesday, with a batch of a major tech earning set to follow the market’s closing bell.
Microsoft Corp., MSFT Alphabet Inc. GOOG GOOGL, Apple Inc. AAPL and Meta Platforms, Inc. META are among the biggest names on deck to report quarterly results on Wednesday and Thursday. Investors will be looking for more reassurances around the potential for companies to monetize the AI spending race, and for a gut-check on whether tech gains can live up to their current valuations.
Encouraging signs from earnings could help stocks sail through to huge annual gains in a tumultuous 2025. Signs of doubts, however, could stoke more volatility, right when investors were hoping for fewer plot twists ahead of next year.
“The markets have had a huge run,” said Richard Steinberg, global market strategist at Focus Partner Wealth, pointing to the S&P 500 index’s recent charge toward the 6,900 level for the first time in history. “But at these levels, investors need to be very careful about what they own and expectations for what companies are going to be reporting” in a big week for corporate earnings, he said.
Outside of additional Big Tech gains on Tuesday, the Dow Jones Industrial Average DJIA, S&P 500 index SPX and Nasdaq Composite Index COMP all closed with a third straight day of simultaneous record closes.
Steinberg said his firm lately has been “trimming at the margin to have some dry powder,” because any earnings jolts could trigger a pullback in stocks. He also thinks investors should pay close attention to the trajectory of the 10-year Treasury yield BX:TMUBMUSD10Y in the coming days, especially in terms of what it signals for high-growth stocks. He thinks much of the “good news” this year already may be priced in.
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Third-quarter earnings, so far, have reinforced the three-year bull market. Eye-watering gains for the so-called “Magnificent Seven” mega-cap tech stocks also have been hard to ignore.
Yet lopsided gains aren’t unique to stocks. Many lower-income households have struggled to afford rent and groceries, while wealthier households with assets like stocks and homes have been fueling spending — and the economy.
“The wealth effect this year has been hugely important to the economy,” said Matthew Miskin, co-chief investment strategist at Manulife John Hancock Investments. That’s not only because many investors now have a big concentration to a small group of tech stocks; but those companies also have grown dramatically.
To put a finer point on it, the S&P 500’s largest 10 companies were more than 40% of the index at the end of September, about double their size over the past 30 years, according to Anthony Saglimbene, Ameriprise chief market strategist.
With stocks hitting a series of fresh record highs this week, it doesn’t exactly scream the need for more Fed rate cuts. Yet there’s a fair amount of trepidation around the tone Fed Chair Jerome Powell might strike during his Wednesday afternoon press conference.
“In our view the Fed’s ‘institutional memory’ of summer 1998 — when three rate cuts totaling -75bps may have helped spur on the dot-com bubble — remains a relevant consideration,” said Thierry Wizman, global FX and rates strategist at Macquarie Group, in a Tuesday client note.
Investors still expect the Fed to cut interest rates by another 25 basis points on Wednesday, in part to safeguard against further weakening in the jobs market.
But there have been fresh signs of doubt. The odds on Tuesday were roughly split between 50 basis points of cuts through the end of January of 75 basis points, according to the CME FedWatch Tool. Last week they favored a decrease of 75 basis points.
“The markets are pretty primed up for an easing bias,” said Miskin. Yet the Fed might cut rates Wednesday and say it’s time to stop reducing the size of its balance sheet. It already has fallen from a nearly $9 trillion peak size to closer to $6.6 trillion, draining liquidity from markets in the process.
Plans for the Fed’s balance sheet matter, especially with the 10-year Treasury yield BX:TMUBMUSD10Y lately steady around 4%, Miskin said. If the Fed signals it will soon start reinvesting more proceeds from its maturing bonds back into the market, that could help sop up some of the expected extra Treasury supply needed to fund tax cuts and the rest of President Donald Trump’s signature One Big Beautiful Bill Act.
The benchmark 10-year Treasury rate hit 4.8% earlier this year on inflation concerns, trade jitters and worries about political interference that could jeopardize the Fed’s independence on policy decisions.
Increased tariff revenue has eased some of those concerns, even though it’s less clear if some of that revenue still could be diverted to bail out farmers hit by the tariff fight, or be used for other things than helping to pay down the large U.S. debt load.
Given lingering uncertainties, and inflation still above target at 3%, Powell on Wednesday also could simply keep investors waiting on the edge of their seats heading into the holidays, Miskin said.
The S&P 500 was up more than 17% on the year through Tuesday, while information technology sector XX:SP500.45 was 30.6% higher for the same stretch, according to FactSet.
Should the three major U.S. stock indexes hit a fourth straight day of records Wednesday, it would be the longest such win streak since Nov. 3, 2021, according to Dow Jones Market Data.
-Mike DeStefano contributed