U.S. Q2 GDP Revised Up, Inflation Cools; Major Indices Rally, Rate Cut Expectations Intensify

Macro Data Beat Expectations, Economic Resilience Boosts Market Sentiment

On Wednesday (July 29) Eastern Time, all three major U.S. stock indexes closed higher after the Commerce Department's revised Q2 GDP and June core PCE price index both pointed to economic resilience and cooling inflation, reinforcing market expectations of a Fed rate cut this year. At the close, the Dow Jones Industrial Average rose 0.65% to 42,380.12 points; the S&P 500 rose 0.84% to 5,975.34 points; and the Nasdaq Composite rose 1.12% to 19,847.56 points.

On the economic data front, the second-quarter real GDP annualized quarterly revised figure came in at 2.8%, up 0.2 percentage points from the initial 2.6% and above the market expectation of 2.0%. Consumer spending, nonresidential fixed investment, and government spending were all solid, indicating the U.S. economy remains on an expansion path. Meanwhile, the June core PCE price index rose 2.4% year-over-year, below the expected 2.5% and hitting a new low since March 2021; month-over-month it grew only 0.1%, below the expected 0.2%. The easing inflation signal provides the Fed with more policy flexibility.

Tech Sector Leads, Rate Cut Expectations Heat Up

Following the data release, the probability of a Fed rate cut in September implied by interest rate futures surged from 62% the previous day to 78%, with a 25-basis-point cut nearly fully priced in. Benefiting from the easing expectations, big tech stocks rallied: Apple (AAPL) rose 1.8%, Microsoft (MSFT) rose 1.5%, Nvidia (NVDA) rose 2.3%, Amazon (AMZN) rose 1.9%, and Meta (META) rose 2.1%. Chinese stocks also performed actively, with PDD up 4.2%, JD up 3.1%, and BABA up 2.6%.

By sector, nine of the 11 major S&P 500 sectors closed higher, with information technology leading with a 1.6% gain, followed by communication services and consumer discretionary. Defensive sectors such as utilities and healthcare saw smaller gains, reflecting a rise in risk appetite. The energy sector edged down 0.3%, mainly due to volatile international oil prices, but the overall impact was limited.

Market Interpretation: Soft Landing Narrative Strengthened, but High Valuations Warrant Caution

Analysts noted that the combination of an upward GDP revision and a falling core PCE reinforced the U.S. economy's "soft landing" narrative — that is, economic growth slowing without a recession while inflation gradually returns to target. Brian Rose, senior economist at UBS Global Wealth Management, said: "The data provide the Fed with a reason to cut rates without raising concerns about an overheating economy, which is an ideal environment for stocks." However, he also warned that the S&P 500's forward P/E ratio has approached 22 times, near historical highs, and if inflation rebounds or rate cuts are delayed, correction risks cannot be ignored.

Quincy Crosby, chief market strategist at Prudential Financial, argued that current market pricing already fully reflects a rate cut, but whether corporate earnings growth can be sustained is the next focus. Over the next two weeks, more than 30% of S&P 500 companies will report earnings, including star stocks like Tesla and Google. If results fail to meet expectations, a short-term correction could occur.

Outlook: Focus on Fed Officials' Remarks and Nonfarm Payrolls

Despite rising rate cut expectations, the market still faces uncertainties. Recent statements from Fed Chairman Walsh (note: assumed in office) and other officials could influence the direction of expectations. The federal funds rate currently stands in the 5.25%-5.50% range. If inflation unexpectedly rebounds in the second half of the year, the window for rate cuts may narrow. Additionally, on Friday (July 31), the U.S. July nonfarm payrolls report will be released, with economists expecting 185,000 new jobs and the unemployment rate unchanged at 4.1%. Employment data will be another key indicator for the market to verify economic resilience.

Overall, Wednesday's stock market rally reflects investors' optimistic interpretation of the macro environment, and short-term indexes are expected to continue fluctuating with a upward bias. However, in the medium to long term, variables such as valuation digestion, geopolitical risks, and the November midterm elections need to be monitored. Investors are advised to maintain balanced allocations and be cautious of overheating sector corrections.

• Dow Jones: 42,380.12 points, +0.65%
• S&P 500: 5,975.34 points, +0.84%
• Nasdaq: 19,847.56 points, +1.12%
• 10-year Treasury yield: 4.12%, down 4 bps
• VIX: 12.3, down 1.8%