"The purchasing power of middle- and high-income groups has been critical, helping to keep the current quarter's GDP outlook solid (3.8% growth versus expectations and 3.3% in the prior month). However, core inflation in services-particularly housing, healthcare, and insurance-remains sticky. This is the main reason why the Fed maintains a cautious stance: it does not want to tighten policy excessively and damage the labour market, but it also cannot move aggressively toward rate cuts while inflation has yet to return to its 2% target."
"Meanwhile, U.S. Treasury yields remain elevated, putting pressure on equity valuations. When yields rise, the equity risk premium narrows, reducing the relative attractiveness of equities and putting long-duration growth stocks such as technology and communication services under pressure. Conversely, when yields ease, large-cap tech-especially companies tied to artificial intelligence (AI)-tend to rebound quickly and drive the index higher. This explains why the late-week rally was led primarily by megacap stocks."
"In terms of corporate performance, major companies continue to enjoy momentum thanks to the investment cycle in AI infrastructure. Revenues and earnings in the tech sector are supported by surging demand for data centers and processors. However, the market has begun to demand greater clarity on free cash flow generation in the coming quarters to justify elevated valuations."
The S&P 500 rose 0.59% on Friday yet closed the week slightly lower, ending a three-week winning streak. Personal spending and purchasing power among middle- and high-income groups have kept final demand resilient and supported a solid current-quarter GDP outlook (3.8% versus expectations and 3.3% prior). Core services inflation, especially housing, healthcare and insurance, remains sticky, prompting the Fed to stay cautious and avoid premature rate cuts until inflation nears the 2% target. Elevated U.S. Treasury yields compress equity risk premia, weighing on long-duration growth stocks. Megacap tech rallied late in the week amid AI infrastructure-driven revenue momentum, but markets now seek clearer free-cash-flow outlooks to justify high valuations.
#sticky-services-inflation #federal-reserve-policy #us-treasury-yields #ai-infrastructure-demand #equity-valuations
Read at London Business News | Londonlovesbusiness.com
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