Morning in New York: Speculation Over the Fed's Interest Rate Is Intensifying

A daily review and forecast of events in the U.S. stock market by Mikhail Denislamov, Deputy Director of Capital Markets Research at Freedom Broker.

The main external risk remains Iran’s possible response to further U.S. missile strikes and additional restrictions on shipping through the Strait of Hormuz. WTI closed Wednesday at $90.47 per barrel. Trading around $90 is causing nervousness due to the potential impact on inflation expectations, but a local stabilization of the situation and the absence of new active hostilities in the Strait of Hormuz could bring relief to stocks on Thursday.

At 8:30 a.m. Eastern Time (ET), initial jobless claims will be released. The consensus estimate is 205,000, following 203,000 the previous week. At the same time, final second-quarter productivity data will be released, with a forecast of 1.4% growth, along with labor cost data, which is projected to rise by 1.3%. At 9:45 a.m. ET, the final S&P Global Services PMI is expected to come in at 56.8 points, and 15 minutes later, the ISM Services Index will be released with a consensus estimate of 54.1 points (previous reading: 54.1). Our macroeconomist expects the ISM result to be close to the consensus, but allows for a slight upward deviation. Market pricing indicates a probability of approximately 60–65% that the Fed will raise rates by 25 basis points in September, which maintains a high risk of a hawkish outcome.

Special attention should be paid to the remarks by Federal Reserve Board member Christopher Waller at 8:30 a.m. ET. This is his first substantive public update on the economy and monetary policy since July 13, and Waller remains one of the few key FOMC members whose position ahead of the September meeting is not yet entirely clear. Against the backdrop of a weakening labor market and persistent inflation risks, it is important for investors to understand whether he is leaning toward a rate hike or believes it is more appropriate to maintain the current rate. Given the approaching blackout period, Waller’s comments could significantly shift market expectations regarding the likelihood of the Fed’s September decision and trigger a reaction in Treasuries, the dollar, and growth stocks.

Ciena (CIEN), Campbell's (CPB), and Toro (TTC) will report earnings before the market opens. After the market closes, Lululemon (LULU), Zscaler (ZS), Samsara (IOT), DocuSign (DOCU), and Guidewire Software (GWRE) will report their results.

Futures point to a neutral opening. We assess the risk balance as neutral but fragile; volatility may increase during the day following the release of the ISM report. The S&P 500’s target range is 7,610–7,720 points. Resistance is located around 7,710–7,720, where the 20-day moving average lies.

— Snowflake (SNOW) is up more than 23%. Ahead of the earnings report, investors were keen to understand whether the spread of AI was driving faster adoption of the platform. The company provided a positive answer: quarterly revenue came in at $1.55 billion, beating the consensus estimate of $1.48 billion, while product revenue grew by 37%. The full-year product revenue forecast was raised from $5.84 billion to $6.07 billion. The results confirmed business acceleration for the third consecutive quarter.

— Broadcom (AVGO) is down 3.6% following a volatile reaction and an initial drop of about 6%. Results beat expectations: revenue totaled $29.6 billion, and AI semiconductor revenue reached $16.7 billion, up 221% year-over-year. The overall revenue guidance for Q4 of $34.8 billion was slightly below consensus, but management expects $21.7 billion in AI revenue for the current quarter and approximately $115 billion for fiscal year (FY) 2027. The strong long-term outlook for AI partially offset the high bar set by expectations for the current quarter.

— Hewlett Packard Enterprise (HPE) is down about 3%, despite a strong earnings report and an upward revision to its guidance. Adjusted earnings were $1.11 per share, compared to $0.94, revenue was $12.2 billion, compared to $12.0 billion, and the forecast for the fourth quarter also exceeded expectations. An additional positive was a $3.5 billion contract with a hyperscaler for inference infrastructure and the expansion of its partnership with Oracle. Pressure on the stock stems from the expected normalization of gross margin metrics as the share of AI systems grows and from ongoing supply constraints.

— NetApp (NTAP) shares are down about 8%, even though the earnings report was strong and the full-year outlook was raised. Revenue came in at $2.03 billion versus $1.84 billion, adjusted earnings per share at $2.58 versus $2.12, and revenue and EPS guidance for FY2027 were significantly raised. Negative factors included a 35% decline in free cash flow to $401 million and an increase in inventory. Following a strong prior rally, these weaknesses proved sufficient to outweigh the strong results in the earnings report.

— Five Below (FIVE) is up 4%. The main concern was the resilience of demand from price-sensitive consumers. Adjusted earnings came in at $1.68 per share, beating the consensus estimate of $1.39, while comparable sales rose 14.1%, exceeding the expected 10.3%. Their full-year growth forecast was raised from 6–8% to 10–12%, confirming the resilience of demand in the budget segment. A new $600 million share buyback program was also announced.

U.S. indices snapped a three-day losing streak. The Dow Jones rose 0.56%, the S&P 500 rose 0.46%, the Nasdaq-100 rose 0.23%, and the Russell 2000 rose 1.13%. The ratio of advancing to declining stocks was 1.68 to 1 on the NYSE and 1.96 to 1 on the Nasdaq. The Russell 2000’s outperformance indicates expanding demand beyond the largest companies. Forty-eight percent of the index’s components are trading above their 50-day moving average, and 65% are above their 200-day moving average.

The gains were concentrated in semiconductors and AI infrastructure. The semiconductor sector rose 1.06%, while software developers fell 1.96%. Nvidia (NVDA) rose 3.21% and contributed about 25 basis points to the S&P 500’s gain. Dell Technologies (DELL) rose 15.81%, and GitLab (GTLB) rose about 10%. At the same time, Credo Technology (CRDO: −20%), MongoDB (MDB: −13.5%), and Palo Alto Networks (PANW: −9.3%) fell. The market reaction to the earnings reports confirms that investors reward an acceleration in key metrics but react harshly to weak guidance or results that fall short of expectations.

Falling yields provided support for stocks. The yield on two-year Treasuries fell by 3 basis points to 4.37%, on 10-year Treasuries by 1 basis point to 4.78%, and on 30-year Treasuries by 1 basis point to 5.26%. ADP reported a gain of 38,000 jobs, compared with the consensus estimate of 47,000, while factory orders rose 0.9%, exceeding expectations of 0.7%. The Fed’s Beige Book pointed to moderate growth in economic activity, weak job growth, and persistent price pressures.

The session took the form of a selective rally. The narrowing of spreads and falling yields were positive signs; however, the fact that the S&P 500 is trading below its 20-day moving average, along with weakness in the software sector, does not yet confirm a shift toward sustainable growth.

This article was AI-translated and verified by a human editor