Crunch Time for Stocks with Inflation and Fed Looming

Stocks are holding their ground before key inflation data that could determine the course of interest rates.

The S&P 500 rose 0.1 percent between Friday, August 28, and Friday, September 4. The index rebounded from a one-month low at earlier highs from June. AI-related stocks like Dell Technologies (DELL) and Micron Technology (MU) led the gains, which may suggest that investors are returning to the same IT hardware names that drove earlier rallies.

Will the move continue? The answer could arrive on Thursday or Friday morning, when the government releases the wholesale producer price index (PPI) and consumer price index (CPI). Those inflation reports could have a major impact on the direction of borrowing costs.

In particular: Will longer-term yields on the 10- and 30-year Treasuries keep rising to new multiyear highs? And, will the Federal Reserve raise its overnight rate at its next meeting on Wednesday, September 16? Those outcomes, in turn, could determine whether stocks keep climbing or reverse.

Rates and the Fed

Last week's headlines pointed in both directions.

New York Fed President John Williams said on Tuesday that the strong economy -- not inflation -- has pushed yields higher. Two days later, Governor Christopher Waller said "we are finally seeing some signs of disinflation." Both comments leaned toward not hiking rates.

U.S. President Donald Trump also urged the central bank to lower interest rates. "LOWER THE RATE OR I’LL STOP TRADING WITH COUNTRIES WITH WHICH WE HAVE A DEFICIT," he wrote in a Truth Social post on Friday.

Other developments pointed toward higher rates. Most importantly, non-farm payrolls increased triple the expected amount in August and previous months were revised higher.

Diesel prices hit a new record high and shipping analytics firm FreightWaves said trucking costs jumped as capacity fails to keep up with demand. The Fed's Beige Book report on economic conditions noted "widespread ... price increases for energy, transportation, and raw materials."

Two voting members of the Fed's policy-setting committee, Governor Michael Barr and Cleveland Fed President Beth Hammack, made public comments leaning toward rate hikes.

Hardware Comeback?

Semiconductor and IT hardware companies climbed last week. One catalyst was DELL's quarterly report, which featured record orders for AI servers. That helped make SanDisk (SNDK) the biggest gainer in the S&P 500. The provider of NAND memory chips is also scheduled to appear in conferences this week. It also joined the S&P 100 index, along with DELL.

Other companies involved in the data-center investment climbed. The list included cooling firms like Vertiv (VRT) and Comfort Systems USA (FIX), power systems like Bloom Energy (BE) and hardware names like HP (HPQ) and Intel (INTC).

Nvidia (NVDA) played a role as well. First, its strong earnings report on August 27 continued to support growth expectations. Second, the chip giant agreed to spend $12.9 billion on open-source AI platform Hugging Face. That could help NVDA defend its business as AI development increasingly moves toward open-source models.

Skyworks Solutions (SWKS) climbed on optimism about its planned combination with Qorvo (QRVO). The merger would create a major global supplier of RF, analog and mixed-signal chips, with more than $500 million in expected annual cost savings. The companies also supply connectivity, power and signal-management products used in AI data centers.

Robinhood Markets (HOOD) followed cryptocurrency prices higher.

Energy and technology were the two strongest sectors overall last week. Agriculture companies like Deere (DE) also advanced.

Discretionaries Fall

Consumer discretionaries fell the most last week. Lululemon Athletica (LULU) led the declines after issuing weak guidance. Travel-related companies also fell.

Fair Isaac (FICO) dropped after U.S. housing regulators pushed the use of the competing VantageScore credit-rating system.

Edison International (EIX) dropped after a California law didn't shield the utility from wildfire liability.

Software companies also gave back some of their recent gains and higher rates weighed on homebuilders.

Charting the Market

The S&P 500 is in a tight range and some chart watchers may see potential for more upside.

The index tested and held its June high of 7621. That could mean old resistance became new support -- a potentially bullish pattern.

It also returned above its 8- and 21-day exponential moving averages.

Perhaps most important is the improving relative strength in technology, the market's largest and most-important sector. The overall market stalled in June and July and tech lagged. It broke out in early August as the sector rebounded. Tech and the Nasdaq-100 have stabilized versus the S&P 500 in the past month and outperformed the last two weeks.

Bollinger Bandwidth has also narrowed. Such tight movement could mean stocks have potential for a big move, which increases the potential importance of events like this week's inflation reports.

The Week Ahead

This week is shortened by Labor Day. There are several technology events leading into the big inflation reports.

The Goldman Sachs Communacopia + Technology Conference and Citi Global TMT Conference both start today. Companies including NVDA, MRVL, SNDK, Western Digital (WDC), CoreWeave (CRWV) and DELL will make appearances.

Mortgage applications are due on Wednesday morning. Apple (AAPL) holds a product event at 1 p.m. ET, which is expected to feature the launch of the iPhone 18 Pro and the first foldable iPhone.

The PPI inflation report is scheduled for 8:30 a.m. ET on Thursday. Jobless claims, existing home sales and crude-oil inventories are also due. Oracle (ORCL) and Adobe (ADBE) report earnings in the postmarket.

CPI at 8:30 a.m. on Friday could be the biggest event of the week.