Weekly Stock Market Update & SPY Technical Analysis
I’d hate to be Kevin Warsh right now. The guy took office a couple of months ago as the new Chair of the U.S. Federal Reserve, arguably making him the most important man in finance. Investors initially celebrated his nomination, expecting him to lower interest rates as Trump suggested he’d do; however, the current state of the economy has taken a turn, with elevated oil prices now pressuring the Fed to raise rates instead of cutting them.
It’s Decision Week: Cut, Hold, or Raise?
The lead-up to this week has been somewhat dramatic. Traders predicted multiple rate cuts at the start of 2026, but now prediction markets estimate just a 4% chance of a rate cut by the end of the year (Kalshi). We’ll hear the decision this week, followed by a press conference from Warsh. We’re already noting an increase in volatility leading up to this week, with SPY’s current implied volatility reading at 1.90 versus the neutral 1.00, measured over the past twenty sessions.
The twist in all of this is the pressure from Trump. A U.S. president isn’t usually involved in the decisions the Fed makes. The committee was formed with a dual mandate to promote two economic goals: maximize employment and stabilize prices. The economy has been “nice” to the Fed, as the job market remains strong, but the committee has absolutely failed to stabilize prices. A dollar today has ~77% of the purchasing power it did in 2020, and while there was a period during these years when inflation did drop close to the Fed’s 2% target, Americans are still left with a much weaker dollar.
The Fed’s balance sheet expansion is a big factor in the dollar’s devaluation, but it was the combination of high government spending, global supply chain disruptions, and commodity shocks that created a perfect storm following the pandemic. Apart from a pullback in energy and food costs, there’s really no “going back” to lower prices. The cumulative inflation since 2020 is now baked into the economy that Kevin Warsh took over after Powell, and now he’s facing a prolonged oil price shock that’s sending ripples across the economy. It’ll be interesting to hear how he plans to deal with this during the press conference; we’ll cover it in real time as it happens.
Where’s the Stock Market Going?
More than 80% of S&P 500 companies exceeded earnings expectations, above the long-term average of ~78%. So, while there are issues in the economy, business on Wall Street is booming. But how? It’s the AI boom. The AI infrastructure and data center buildout accounted for roughly one third of S&P 500 EPS growth in Q2, helping counterbalance the weakness in the economy.
The AI buildout is an advantage and a threat for investors, especially considering the economic headwinds the U.S. is facing. The stock market is not THE economy, but GDP growth is driven largely by consumer spending. High spending on the AI buildout won’t last forever. And now, top AI leaders are calling for a “slowdown” in AI development, a new headwind investors are facing. That means the very thing that was fueling the market rally is now under threat, and two of the largest private AI companies, OpenAI and Anthropic, are now considering a delay of IPO.
With all that being said, the two main drivers of the market are earnings and monetary policy. The market already got confirmation of record earnings, but interest rates remain uncertain. As long as oil prices remain elevated, rate cuts are improbable, which can weigh on growth stocks. Our playbook going forward focuses on companies with strong cash flow, predictable earnings, and healthy balance sheets. Money rarely sits idle in the market, and even if bond yields spike and compete for investor capital, stocks still arguably offer the best returns. We’re still bullish in the medium to long term.
SPY Technical Analysis
As mentioned above, SPY’s implied volatility is elevated. The expected move by September 30 is (+/-) $20.47, which can potentially put the index at record highs by the end of the month or below its 100-day moving average (below the average price investors have been willing to pay over the past 100 days). The price action could also range between those points.