Week Ahead: Fed, Inflation and Earnings Set Market Direction

Overview

• US growth remains positive, but weak hiring and rising inflation leave the Federal Reserve with limited room to ease policy.
• Corporate earnings still support equities. Traders should assess profit guidance alongside borrowing costs before treating market weakness as a buying opportunity.
• The Fed decision, US GDP and PCE inflation could drive sharp moves across the dollar, gold and stock indices during 26–30 October.
• Key chart levels include 7,735 for SP500, $3,942.70 for gold and $106.745 for US oil. Price confirmation around these levels will help distinguish rebounds from trend changes.

Last Week’s Sell-Off Tests Confidence in Earnings

US equities fell for a second consecutive week. The S&P 500 lost 0.5%, while the Nasdaq Composite declined 0.7%. Semiconductor shares fell 3.2%, reflecting greater pressure on a sector closely tied to technology spending. Treasury yields also declined, but lower borrowing costs failed to lift the broader market.

Investors now need corporate results to support equity prices as higher energy costs threaten business margins and household spending.

Can the US Stock Market Still Rise?

Stock markets often turn before the economy does. Shares can fall before a recession begins and recover before economic data improves. Identifying the current stage therefore requires a combined view of output, employment, spending and inflation.

The available evidence points to a mature US expansion with rising risks, rather than an outright recession. GDP grew at an annualised rate of 2.2% in the second quarter, while September unemployment stood at 4.2%. Output continues to expand, although weaker hiring suggests growth is losing momentum.

A later stage of expansion does not automatically mark a stock market peak. Further gains depend on whether companies can grow profits despite pressure on demand and financing costs.

Inflation Restricts the Fed’s Choices

September consumer prices rose 0.6% month on month and 3.7% year on year. Producer prices increased 1.3% during the month, adding pressure on business costs.

Markets expect the Fed to hold its target range at 3.75%–4.00% this week. However, persistent inflation could keep further tightening on the table. Traders will assess how officials balance price pressures against weaker hiring.

The Fed announces its decision before the 29 October GDP and PCE releases, creating scope for markets to reassess the policy outlook soon after the meeting. Hotter inflation could support the dollar and weigh on gold through higher expected interest rates. Softer inflation could ease that pressure, provided growth holds up.

Earnings Can Extend the Equity Cycle

Corporate profits remain a source of support for equities. According to FactSet’s 16 October report, S&P 500 earnings were projected to grow 29% year on year in the third quarter, with full-year 2026 growth forecast at 32.8%.

The index’s forward price-to-earnings ratio stood at 19 times, slightly below its 10-year average of 19.1 times. This suggests share prices may be reasonable relative to expected profits, provided companies meet those forecasts.

The strength of earnings beats also deserves attention. Although 84% of reporting companies exceeded estimates, aggregate earnings came in just 2.6% above expectations, compared with the five-year average of 7.5%. Beating forecasts by a narrow margin may offer less support for further gains, particularly when investors already expect strong growth.

Government bonds add competition for capital. With the 10-year Treasury yield around 5%, investors can compare potential equity returns with higher returns from fixed-income assets.

Equities could still advance if earnings growth offsets a decline in valuation multiples. Traders should watch to assess whether that support can last.

Three Paths Will Guide Market Direction

Continued expansion: Easing inflation, stable Treasury yields and resilient profits could support further equity gains, with new highs possible if companies deliver on expectations.

Stagflationary slowdown: Weakening demand alongside persistent inflation would limit the Fed’s scope to ease policy. Businesses could face squeezed margins, leaving equities vulnerable to sharper swings.

Recession: A broader decline in employment, consumption and profits would strengthen the case for contraction. Shares could price in that deterioration before official data confirm it.

This week tests whether markets can sustain their initial response to the Fed after GDP, PCE and corporate results arrive. A rebound supported by both economic data and earnings guidance would offer evidence of renewed buying demand.

Key Symbols to Watch

SP500 | XAUUSD | USOIL | USDX | EURUSD

Upcoming Events

For a full view of upcoming economic events, check out VT Markets’ Economic Calendar.

Key Movements of the Week

SP500

• Price could rise from current area but monitor the type of price action to determine the structure.
• Should price rise, monitor price action at 7,735.

XAUUSD

• If price trades lower, look for bullish price action when it dips below 3942.70.

USOil

• USOil broke 102.546.
• Monitor price action once USOil breaks 106.745.

USDX

• USDX is trading near the 101.00 monitored area.
• Should price trade lower, look for bullish price action at 101.00.

EURUSD

• Should price consolidate next, EURUSD could trade higher.
• If that happens, monitor price action at 1.1350.

Bottom Line

As of October 24th, the U.S. economy appears to be approaching the later stages of expansion, but there isn’t enough evidence to conclude a recession. Strong corporate earnings continue to provide support for equities. However, persistent inflation, elevated Treasury yields and tighter monetary policy make further gains increasingly dependent on actual profit growth rather than investor optimism.

Traders are now deciding whether corporate earnings can sustain the bull market before economic conditions worsen. The U.S. may be late in its economic cycle without necessarily being at the end of its stock market cycle.

Create a live VT Markets account today to access our platform features, including market insights and educational content.

Start trading now — click here to create your real VT Markets account.