Market Insights

The U.S. economy could be accelerating, even as the Federal Reserve enters a rate-cutting cycle.

Retail sales beat estimates for the third straight month in August, lifted by strong demand for autos. Industrial production increased by 0.8 percent, quadruple the forecasts and the highest level since February. Those followed the first positive reading this year from the New York Fed’s Empire State Manufacturing Survey.

“Firms grew more optimistic that conditions would improve in the months ahead,” Monday’s report said about September. “New orders climbed, and shipments grew significantly.”

Rail traffic, which measures shipping trends, has also strengthened. Data from the American Association of Railroads shows year-over-year increases of 7-10 percent in the last four weeks. That’s up from 3-4 percent gains in earlier weeks.

The result? The Atlanta Fed’s GDPNow tracking model currently estimates economic growth of 3 percent in the current quarter. That’s the highest level since the numbers started in July.

Tight Money

Even with the data strengthening, futures markets are pricing in bigger rate cuts. CME’s FedWatch tool shows a 63 percent chance of the overnight rate dropping 50 basis points this afternoon. Just a week ago, there was a 66 percent chance of only 25 basis points of cutting.

Some investors may view that scenario as favorable for risk assets like stocks. On one hand, the economy could be strong enough to support spending and confidence. On the other hand, inflation has slowed enough to cut rates.

For example, the Fed’s overnight target rate is more than 2.5 percentage points above the current rate of inflation. That makes it the most restrictive policy since August 2007. The labor market has also weakened lately. Those points make central bankers want to lower interest rates.

First Half vs Second Half

These changes in the economy are impacting the stock market. TradeStation Data shows a dramatic change in performance in the second half as investors pivot from away from secular growth stocks toward everything else.

This rotation partially results from redeploying capital away from sectors that have dominated for almost a decade, like technology (which is up more than 400 percent in the last 10 years). Buying has occurred in real estate, utilities and financials. While these stand to benefit from lower interest rates, they may also have their own fundamental stories. For example, utilities have cited increased power demand (partially from AI and data centers), and financials have enjoyed stronger lending margins.

The calendar is also relatively quiet for big tech stocks. There seem to be few important events after today’s Fed meeting. Tesla (TSLA) will probably report quarterly deliveries at the start of October, but the expected Robotaxi event on October 10 could get more attention. Earnings come later in October and early November.

In conclusion, the economy has gained strength even as the Fed prepares to cut interest rates. While this may be a positive for stocks overall, a different environment could be favoring new parts of the market. Traders may want to keep monitor these trends and take nothing for granted — especially with a new quarter underway.