The Stock Market Rally Stalls Ahead of the Fed Decision

Wall Street traders kept a cautious stance on Tuesday, holding off on major moves as they awaited the Federal Reserve’s next policy decision. With markets looking to the central bank for guidance on interest rates, investors are positioning for signals that could shape sentiment for the months ahead.

‍

Fresh data on U.S. retail sales provided only limited impact during early trading. Stocks held onto gains, while Treasury yields hovered near their recent lows, underscoring the sense of anticipation.

‍

Retail spending showed solid momentum in August, marking a third straight monthly increase and capping off a summer of resilient consumer demand. Commerce Department data revealed that retail purchases rose 0.6% from the previous month, matching July’s pace. Excluding autos, sales posted a stronger 0.7% advance, highlighting broad-based strength across categories.

‍

Futures tied to the S&P 500 pointed toward a fresh record open, while Nasdaq 100 contracts indicated the tech-heavy index was on track to extend its winning streak to 10 sessions. In fixed income, the 2-year Treasury yield held steady at 3.53%, reflecting little shift in short-term rate expectations. Meanwhile, the U.S. dollar slipped, adding to signs that traders were hesitant to commit until after the Fed’s announcement.

‍

“The market is entering a phase of what could be called ‘Fed paralysis,’ where participants are reluctant to make aggressive bets ahead of the decision,” noted Tom Essaye of The Sevens Report.

‍

Sentiment among institutional investors has been improving. Bank of America’s latest global fund manager survey showed that 28% of respondents are overweight equities a seven-month high. Optimism on economic growth also saw its sharpest uptick in nearly a year, with only 16% of managers still expecting a slowdown, according to chief strategist Michael Hartnett.

‍

Hartnett added that while bullish positioning is growing, it has not yet reached levels that would raise red flags about overheating. “There are plenty of bulls in the market right now, but equity exposure hasn’t stretched to extremes, which suggests this rally still has room to run,” he wrote.

‍

Even so, concerns about valuations are creeping higher. Critics warn that the S&P 500’s relentless climb could be drifting into bubble territory. Much of the spotlight has been on technology’s outsized role in driving 2025 gains, but analysts at Seaport Research Partners argue the broader market may actually be more stretched.

‍

Data shows that an index of S&P 500 companies excluding tech has risen 13% over the past 12 months, even as earnings growth in those sectors has lagged at just 6.4%. By contrast, the S&P 500 Information Technology index has surged 27% in the same period growth that is more closely aligned with its nearly 27% earnings increase.

‍

That comparison suggests that while tech stocks often draw scrutiny for their high valuations, the sector’s performance is more in line with its earnings momentum. Non-tech sectors, on the other hand, appear to be trading at richer valuations relative to their fundamentals.

‍

With the Fed’s two-day meeting underway, the broader market remains in a holding pattern. Traders are widely expecting a quarter-point rate cut, but the tone of Chair Jerome Powell’s comments will be critical in determining how much further the central bank is willing to go in easing policy.

‍

For now, markets are balancing a mix of optimism and caution: resilient consumer spending, upbeat investor sentiment, and solid earnings growth on one side; elevated valuations and policy uncertainty on the other.

‍

As one strategist put it, “The rally has the wind at its back, but how far it can run will depend on what the Fed signals from here.”

‍