Dow Jones, Nasdaq, S&P 500 weekly preview: Markets eye Fed view on labor softness

Investing.com -- The Nasdaq Composite capped a flawless week of record closes on Friday, as softer jobs data and easing inflation reinforced expectations of a Federal Reserve rate cut this week.

The index rose 0.44% to 22,141.10, lifted by gains in Tesla. The S&P 500 slipped 0.05% to 6,584.29, while the Dow Jones Industrial Average fell 273.78 points, or 0.59%, to 45,834.22.

All three benchmarks still ended the week higher, having closed at record levels Thursday when the Dow topped 46,000 for the first time.

The S&P 500 advanced 1.6% for its best week since early August, marking five gains in six weeks. The Nasdaq climbed 2%, notching a second straight positive week, and the Dow rose 1% for its first weekly win in three.

Attention now turns to the Fed’s Sept. 17 meeting, with futures markets pricing in a quarter-point rate cut as nearly certain, according to CME’s FedWatch tool.

Morgan Stanley sees labor data vs. policy as “near-term risk” but backs dip-buying

Investors are awaiting signals from the Fed on how concerned it is about the slowing U.S. job market, with the central bank expected to deliver its first rate cut in nine months to support employment.

“The tension between the weakening labor data and the associated monetary policy response is a near-term risk for markets given the Fed’s continued focus on inflation and markets’ growing expectation for rate cuts,” Morgan Stanley strategist Michael Wilson said in a note.

“While this could lead to some consolidation in equity indices in a weak seasonal period over the next 6-8 weeks, we’re buyers of dips into year-end and continue to lean toward our S&P 500 bull case of 7200 through the middle of next year,” he added.

More uncertainty looms over the size of this week’s cut and the pace of further reductions in the months ahead.

Futures markets currently imply about 73 basis points of easing by year-end, equal to nearly three quarter-point cuts.

The Fed will also release updated economic projections outlining its outlook for growth and monetary policy on Wednesday.

What analysts are saying about U.S. stocks

Morgan Stanley: "Evidence is growing that the rolling recovery is underway, and we continue to lean toward our 7200 bull case by the middle of next year. Near-term risk is centered on the tension between lagging, weak labor data and the Fed’s response that may not meet the markets’ "need for speed.""

Evercore ISI: Whether the Fed is cutting Because They Can (cooling inflation) or Because they Have To (head off Recession) is critical. 12M forward returns are robust when They “Can”, and anemic when They “Have To”. Stocks tend to be choppy in the near term either way when the Fed starts cutting."

JPMorgan: "With respect to equities, overall indices historically have tended to consolidate as the Fed resumed easing, stalling for a few months, and would advance thereafter. In contrast, investors appear to be using the upcoming easing as a reason to look through the current labour market soft patch, with the U.S. market hovering at highs, but the risk is that this changes. Once the easing resumes, equities could turn more cautious for a bit, and price in some more downside risk, in effect repricing the current, potentially complacent, stance."

RBC Capital Markets: "We are introducing preliminary forecasts for the S&P 500 for 2026 of 7,100 (a 2H26 price target) and $297 (full-year 2026 S&P 500 EPS). We anticipate revising these numbers and think they should be viewed as a very early indication of how our models are tracking at the moment. Near term, though we are nudging our YE2025 price target up to 6,350 from 6,250 (mostly due to moving up our full-year 2025 EPS forecast to $269), we remain on guard for choppy conditions in coming months."