U.S. equities pushed higher last week with support from near-term rate cut expectations following in-line inflation readings alongside sustained tech stock leadership on positive data points on AI investment trends. For the week, the tech-heavy Nasdaq Composite led the way with a 2.03% return, while the S&P 500 and Dow Jones indices returned 1.59%, and 0.95%, respectively. Investors are leaning into risk-assets ahead of this week’s Federal Reserve meeting, where the central bank is expected add more punch to the bowl as it resumes rate cuts after holding rates steady for nine months.

Last week’s August inflation reports didn’t derail rate cut expectations despite a modest uptick. Headline CPI accelerated to 2.9% year over year (from 2.7%), while core CPI edged to 3.1% (from 3.0%). Under the hood, shelter prices remained the biggest inflation driver but continued to moderate (about 3.6% y/y and easing for ten straight months); meanwhile, tariff-linked inflation has been visible in recent months across goods and services, but the overall outcome so far has been milder than feared with overall inflation hovering near 3%. The trend of inflation coming into the final quarter of the year remains a key point to monitor as companies may have to increasingly pass on higher import costs with pre-tariff inventory stock depleted.

Despite the inflation data points, the Fed’s dual mandate—balancing inflation and employment—is tipping toward supporting job growth. Fed Chair Jerome Powell acknowledged this adjustment in his August speech, noting a “shifting balance of risks” and signaling openness to easing monetary policy. The shift in focus follows a series of weak employment data capped off by the poor August jobs report (just 22k net payrolls added) and last week’s annual payroll data revision from the Bureau of Labor Statistics that revised down reported job gains by -911k (reduction of 76k per month) for the 12 months ending March 2025. Meanwhile, last week’s initial jobless claims jumped to the highest level in nearly four years, though a large amount of the spike was attributed to one state (Texas) and doesn’t yet suggest a broader firing trend.

Against that backdrop, markets have already priced in a rate cut this week, with CME’s FedWatch tool showing a 95% probability of a 0.25% reduction. There’s a slim chance of a more aggressive 0.50% cut, but we expect the Fed to frame an initial 0.25% move as risk management—acknowledging moderation in core inflation alongside a cooling labor market—while emphasizing a measured, data-dependent path from here. The updates to the Summary of Economic Projections and Chair Powell’s remarks will be key for understanding how far and how fast the Committee sees policy moving back toward neutral.

Alongside rate cut expectations, AI also continues to be a pillar of support for the U.S. equity market. Oracle was a large post-earnings gainer last week after spotlighting a 359% y/y surge in remaining performance obligations to $455B and pointing to a robust AI deal pipeline, while Taiwan Semiconductor’s August revenue jumped 34%, underscoring resilient demand from hyperscalers and sovereign buyers. Directionally, secular AI investment continues to support tech spending and near-term earnings visibility even as macro data chop around.

Looking ahead, aside from the FOMC meeting, investors will get updates on the state of the consumer with August retail spending and housing data released this week. We’re also monitoring the trade backdrop: Beijing’s harder line in negotiations raises headline risk around U.S.–China tech frictions and chip supply chains, with periodic tit-for-tat actions a potential source of volatility for U.S. semiconductor names.

2025 The Long View | First Merchants Bank