S&P 500 and Nasdaq 100 Surge as Fed Rate Cut Bets Shift to 50 Bps Today

Wall Street Rises on Bets for Larger Fed Rate Cut

Wall Street’s main indices gained on Friday as traders increased expectations for a larger interest rate cut by the Federal Reserve at its upcoming meeting. This shift in sentiment was driven by renewed speculation about a potential 50-basis point (bps) cut, a significant increase from previous expectations. The reassessment follows reports that suggest a larger rate cut could still be on the table despite earlier indicators pointing to a smaller adjustment.

At 14:58 GMT, the Dow Jones Industrial Average is trading 41390.05, up 293.28 or +0.71%. The S&P 500 Index is at 5625.40, up 29.64 or +0.53% and the Nasdaq is trading 17673.15, up 103.47 or +0.59%.

Technically, sentiment should remain bullish as long as the benchmark index remains above the 50-day moving average at 5540.28. The next target is the September 3 main top at 5669.75. This is the last main top before the record high at 5721.25, set on July 16.

Traders Reassess Fed’s Next Move

According to CME’s FedWatch Tool, the probability of a 50-bps rate cut surged to 47%, up from just 14% a day earlier. This shift in sentiment was fueled by comments from former New York Fed President Bill Dudley, who argued that a strong case exists for the Fed to make a larger cut. Adding to the uncertainty, multiple media outlets referred to the decision as a “close call,” further suggesting that a more aggressive cut may be possible.

Analysts from Deutsche Bank noted that reports in major financial publications, including The Wall Street Journal and Financial Times, highlighted the possibility of a 50-bps rate cut, prompting traders to adjust their expectations. Previously, markets were anticipating a 25-bps cut following a slightly higher-than-expected U.S. producer price index, which followed the release of August consumer price data.

Market Sentiment Remains Volatile

Bob Savage, head of market strategy at BNY Mellon, emphasized the uncertainty surrounding the upcoming Fed meeting. “Markets want the FOMC to ease fast to address the risk of recession. Regardless of whether the Fed opts for a 25 or 50 bps cut, the decision will be closely scrutinized by investors.” Wall Street’s key indexes closed higher on Thursday, with gains in large-cap stocks, continuing the market’s positive trend for the week.

The Russell 2000, an index of smaller-cap stocks sensitive to economic conditions, surged 1.5%. Additionally, ten of the eleven S&P 500 sectors saw gains, with energy stocks rising 1.20% and  materials stocks rising 1.18%, buoyed by stronger precious metals prices.

Sector Highlights and Corporate Movements

Tech stocks also performed well, with the Philadelphia Semiconductor Index climbing 1.3%. Notable individual movers included Uber, which rose 5.7% after announcing a partnership with Alphabet’s Waymo to expand autonomous ride-hailing services. On the downside, Adobe shares dropped 9% following a weaker-than-expected earnings forecast, and Boeing fell 2.6% as West Coast factory workers initiated a strike after rejecting a new labor contract.

Market Outlook: Eyes on Fed Decision

With traders now pricing in the possibility of a more substantial rate cut, market volatility is likely to remain high ahead of the Federal Reserve’s decision. A larger 50-bps cut could fuel further bullish sentiment, boosting equity markets in the short term.

However, if the Fed opts for a more cautious 25-bps cut, the market may see a temporary pullback as investors recalibrate their expectations. The outcome of next week’s meeting will be pivotal in determining the direction of U.S. equities in the near term.