All three main equity indexes gapped down at the open and showed red at the close with less than 24 hours before the Federal Open Market Committee is expected to announce its third interest rate cut since September.
Whether it’s the last move in the U.S. central bank’s rate-cutting cycle is weighing on investors and traders, even as broadly mixed data continue to show a generally healthy domestic economy.
The FOMC will announce its decision on Wednesday at 2 pm. Fed Chair Jerome Powell’s press conference is scheduled for 2:30 pm. Follow along as we track developments before and after the meeting on our live Fed blog.
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An interest rate cut seems certain, writes Nick Timiraos in The Wall Street Journal, but “inside the central bank, the case for continued reductions will be less clear-cut if the economy continues to chug along.”
Timiraos says a rate cut on Wednesday could mark the end of one phase of a two-phase rate-cutting process and concludes based on recent communication from officials that the Fed “will deliver a much more cautious tone about further cuts.”
The Dow Jones Industrial Average closed lower for the ninth consecutive session – the first time that’s happened since 1978 – declining 0.6% to 43,449. The S&P 500 was down 0.4.% to 6,050. And the Nasdaq Composite shed 0.3% to 20,109.
Incoming data and the FOMC
The Census Bureau reported before Tuesday’s opening bell that advance data show retail sales grew more than forecast in November, rising 0.7% vs a Wall Street estimate of 0.6%. And October retail sales growth was revised upward on further review, from 0.4% to 0.5%.
“November retail activity was solid as consumers have plenty of spending power from higher incomes, rising portfolio values, and stable financial footing,” writes LPL Financial Chief Economist Jeffrey Roach. “This report will likely add to the Fed’s debate about the policy path for 2025. Unless the labor market materially weakens, investors should expect the Fed to ease rates next year but not as much as originally hoped.”
At the same time, the Fed reported that industrial production was down 0.1% in November vs Wall Street expectations of 0.3% output growth, and October’s contraction was revised from 0.3% to 0.4%. Capacity utilization declined from a downwardly revised 77.0% in October to 76.8% in November.
“The data show a mixed picture of the consumer and producer economy,” writes BMO Capital Markets Chief U.S. Economist Scott Anderson. Recent retail sales data underscore “the current strength and resilience of the economic expansion.” Says Anderson, “While it won’t stop the Fed from cutting interest rates this week, it will keep market expectations around the extent and pace of rate cuts next year up in the air.”
According to the CME Group’s Fed Watch Tool, 30-day federal funds rate futures prices still show a 95.4% probability the central bank will cut by 25 basis points tomorrow. That’s down from 98.2% on Monday. Indeed, the money flow is toward the FOMC staying put tomorrow and at its January meeting.
The probability of no rate cut right on Wednesday is still low, but it’s up to 4.6% from 1.8% yesterday. And futures prices show the probability of a fed funds target range of 4.50% to 4.75% following next month’s FOMC meeting is up to 3.9% from 1.5%.
Apple and Tesla are on the move
Apple (AAPL) recently reclaimed the title of biggest publicly traded company in the world on the strength of a 54.5% rally off its April 19 52-week low of $164.08.
AAPL stock now has a market capitalization of $3.828 trillion and has established a solid lead in the race to $4 trillion. J.P. Morgan analyst Samik Chatterjee says AAPL has room to run even if its artificial intelligence initiatives don’t provide a meaningful revenue lift.
“The bull case without AI hinges on healthy revenue and earnings growth led by Services revenue growth and margins with limited further downside on iPhone volumes and an intact premium valuation while investors await datapoints around consumer traction for AI features,” Chatterjee writes.
AAPL was up 1% on Tuesday to $253.48. Chatterjee has an Overweight rating on AAPL and a 12-month price target of $265, implying 4.5% upside from the iPhone stock’s most recent closing price.
Tesla (TSLA) continues to enjoy its extended post-election rally and is now up 90.8% since Donald Trump reclaimed the White House with his November 5 victory.
On Sunday, Dan Ives of Wedbush boosted his 12-month price target for TSLA from $400 to $515. Ives also laid out a “bull case” that ends with TSLA stock at $650. “We believe the Trump White House the next four years will be a ‘total game changer’ for the autonomous and AI story for Tesla and Musk over the coming years,” Ives writes.
On Monday, Vijay Rakesh of Mizuho Securities raised his rating on TSLA stock from Hold to Buy and matched Ives with a $515 price target, up from $230. Rakesh also articulated his own bull scenario where Tesla sees “significant growth acceleration” into 2030 based on development of its Full-Self Driving system, robotaxis and humanoid robots, helped by “favorable regulation.”
TSLA was up 3.6% on Tuesday and has added about $732.9 billion to its market cap since November 5, growing from $807.1 billion to $1.54 trillion.
