Key Takeaways

• Major indexes advance: The S&P 500, Dow Jones, and Nasdaq closed in positive territory as market optimism returned.
• Weak consumer data: Retail sales and consumer spending figures fell below analyst expectations, indicating a possible cooling in US economic activity.
• Rate cut hopes rise: Softer data reinforced investor belief that the Federal Reserve may consider lowering rates to support growth.
• Fed policy in focus: Traders increased bets on a rate cut at the next Federal Open Market Committee meeting, closely monitoring upcoming economic signals.
• Volatility ahead: Key data releases and Fed commentary will remain critical as traders assess the path of monetary policy.

Introduction

US stocks closed higher on Thursday after weaker-than-expected consumer spending and retail sales data renewed hopes for a Federal Reserve interest rate cut. This lifted the major indexes. As market participants balance signs of slowing economic momentum with upcoming central bank decisions, discipline and careful analysis remain essential for navigating likely volatility in the sessions ahead.

Market Performance at a Glance

The S&P 500 rose 0.8% on Thursday, closing at 4,586 points as investors responded positively to soft consumer data that supported hopes for Federal Reserve rate cuts. The Nasdaq Composite led the advances, up 1.1%, while the Dow Jones Industrial Average gained 0.6%, marking its fourth consecutive winning session.

Trading volume stood at 10.2 billion shares, about 12% above the 20-day moving average, reflecting heightened market engagement. All eleven S&P 500 sectors finished in the green, with technology and consumer discretionary stocks leading the way, up 1.3% and 1.2% respectively.

Small-cap stocks outperformed large caps. The Russell 2000 index jumped 1.4% as investors rotated into rate-sensitive assets. The CBOE Volatility Index (VIX) fell 5.2% to 13.8, signaling improved investor confidence amid stronger expectations for rate cuts.

Weak Consumer Data Shifts Sentiment

Key Economic Indicators

The Commerce Department reported April retail sales increased by only 0.2%, significantly below the 0.7% consensus forecast and the weakest reading since January. Core retail sales, which exclude automobiles, gasoline, and food services, rose just 0.1% versus expectations for 0.5% growth.

Consumer confidence also weakened. The University of Michigan’s preliminary sentiment index for May dropped to 67.4 from 77.2 in April, the largest one-month decline since December 2022 and below expectations of 76.0.

Labor market data also softened. Initial jobless claims rose to 267,000 for the week ended May 11, above the 220,000 expectation and the highest level since August 2023. Continuing claims increased to 1.81 million, further suggesting a gradual cooling in the labor market.

Market Reaction

Treasury yields fell following the consumer data releases. The 2-year Treasury yield dropped 11 basis points to 4.68%, the largest one-day decline in three weeks. The benchmark 10-year Treasury yield decreased by 8 basis points to 4.34%, reflecting growing conviction that the Federal Reserve may cut rates sooner than anticipated.

Expectations for rate cuts increased. Fed funds futures now price in about 50 basis points of easing by year-end, compared to 35 basis points before the data release. CME’s FedWatch Tool showed the probability of a September rate cut rising to 62% from 47% the previous day.

Maria Rivera, chief economist at Capital Research Group, stated that the data “shows cracks forming in what has been the strongest pillar of the U.S. economy,” adding that this gives the Fed more justification to begin easing monetary policy if inflation keeps moderating.

Fed Policy Outlook Recalibrated

Changing Rate Expectations

While Federal Reserve officials have not yet signaled a policy shift, market participants increasingly expect the central bank to pivot toward rate cuts following the latest economic data. Fed funds futures now suggest a 75% probability of at least one quarter-point rate cut by the September meeting, up from 58% a week ago.

Sectors sensitive to interest rates, including real estate and utilities, outperformed the broader market with gains of 1.1% and 0.9% respectively. Homebuilder stocks rallied on the prospect of lower mortgage rates. The SPDR S&P Homebuilders ETF (XHB) advanced 1.7%, reaching its highest level since March.

Robert Chen, senior market strategist at Global Investment Partners, noted that the Fed is now in a more complex position. He observed, “Consumer spending shows real weakness while inflation remains above target. The balance is shifting toward growth concerns rather than inflation fears.”

Analyst Reactions

Goldman Sachs updated its forecast, now expecting two quarter-point cuts in 2023, with the first likely in September. The economics team noted that a cooling labor market and weaker consumer spending provide the Fed greater flexibility to begin normalizing policy.

JPMorgan maintained that the Fed will be patient but acknowledged the shifting landscape. Michael Torres, head of U.S. rate strategy, said, “We still expect the first cut in December, but the risks are now skewed toward an earlier move if consumer weakness persists.”

Several FOMC members are scheduled to speak next week. Investors will closely watch their comments for any shift in tone on timing for potential rate cuts, especially Fed Chair Jerome Powell’s remarks at a banking conference on Tuesday.

Sector Performance and Leaders

Leading Sectors

Technology stocks led Thursday’s market rally. Semiconductor companies gained after Taiwan Semiconductor Manufacturing Company (TSMC) reported strong demand for AI-related chips. The Philadelphia Semiconductor Index rose 1.8%, reaching a record high.

Financial stocks advanced 1.0% as banks benefited from a steepening yield curve, which generally improves lending margins. JPMorgan Chase gained 1.3%, and Bank of America added 1.1% amid views that any slowdown would be moderate enough to avoid major loan defaults.

Consumer discretionary shares climbed 1.2%. Despite weak retail data, investors bet that potential rate cuts will eventually support consumer spending. Amazon gained 1.5%, and Home Depot reversed early losses to finish 0.7% higher after descending initially on weak sales figures.

Notable Movers

Walmart surged 4.2% to an all-time high after beating analyst expectations, reporting adjusted earnings per share of $1.70 versus the consensus estimate of $1.57. The company raised full-year guidance, citing resilient spending in grocery and essential categories.

Cisco Systems fell sharply by 12.3%, its largest single-day drop since 2011, after forecasting weaker-than-expected revenue and announcing plans to cut about 5% of its workforce. The company pointed to customer caution in technology spending amid economic uncertainty.

Applied Materials gained 3.5% after posting better-than-expected results and delivering an optimistic outlook driven by artificial intelligence-related demand. Earnings per share were $2.12, exceeding estimates of $1.99.

Navigating Volatility

Strategies for the Current Market

Professional traders are adapting to the changing macro landscape by employing barbell strategies that balance defensive positions with selective exposure to sectors likely to benefit from rate cuts. This approach provides portfolio stability while allowing tactical adjustments based on fresh economic data.

Risk management is essential. Many traders are reducing position sizes and using clear stop-loss levels in this period of heightened volatility. Higher cash allocations (often 15-20%) are common, allowing traders flexibility to act during potential market pullbacks while mitigating risk from unpredictable swings.

Sophia Ramirez, chief market technician at Trade Analysis Partners, explained that disciplined traders are relying more on technical support and resistance levels instead of making large directional bets based on rate predictions. She noted that holding periods are shortening, and profits are being taken more quickly when targets are met.

Key Levels to Watch

Technical analysts highlight 4,600 as a crucial resistance level for the S&P 500, marking the upper boundary of its recent trading range. A strong move above this level could drive momentum toward the all-time highs near 4,800. Failure to break through may trigger a retest of support at the 50-day moving average around 4,515.

Bond market indicators, especially the spread between 2-year and 10-year Treasury yields, remain important for equity traders. The current spread of -34 basis points shows the yield curve is still inverted, though less so than earlier this year. This suggests recession risks have moderated but remain present.

Tomorrow’s release of industrial production and capacity utilization data will offer additional insight into economic momentum and could influence short-term market direction. Consensus expects a 0.1% rise in industrial production; a significant deviation could trigger renewed volatility.

Conclusion

US stocks advanced as softer consumer data increased market confidence in upcoming Federal Reserve rate cuts, driving both equities and rate-sensitive assets higher while volatility declined. This shift highlights how market sentiment adapts when growth concerns overtake inflation fears. What to watch: remarks from Fed Chair Powell and other FOMC members next week, along with tomorrow’s industrial production data for further economic signals.