Good morning Traders and Quants! Wall Street stumbled for a second straight session as investors rotated out of tech and into defensives, while energy once again took the crown. The S&P 500, Dow, and Nasdaq all pulled back modestly but remain within striking distance of their all-time highs. Tech, industrials, pharmaceuticals, and telecom names led the declines, while energy, consumer staples, and utilities outperformed. 

Treasuries sold off, pushing yields modestly higher across the curve as traders digested Fed commentary that reinforced the “no risk-free path” theme Powell laid out earlier this week.The dollar continued its rebound, gaining about 0.5% against a trade-weighted basket of peers, with notable strength versus sterling and the yen.

Commodities were more volatile. Oil surged another 2.5% on Wednesday and is up 4% for the week, supported by Trump’s comments that Ukraine could eventually reclaim all its lost territory, a line seen as raising geopolitical risk premiums. WTI settled just under $65, now testing the top of its recent $60–$65 trading range. 

Gold, by contrast, gave back some of its record-setting gains, slipping to $3,768 as profit-taking met a stronger dollar and slightly higher yields. Futures this morning are flat to modestly negative, as traders mark time before a heavy macro slate: GDP revisions, jobless claims, durable goods, and tomorrow’s PCE inflation. With cash allocations already at multi-year lows, positioning remains stretched, leaving the tape vulnerable to data surprises.

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Momentum is being tested. Powell’s warning that asset prices look “fairly high” landed in a market already jittery from narrow breadth; only 17% of S&P 500 names have outperformed the index in the last three months. The AI-fueled rally continues to mask weak participation, and traders are watching closely whether PCE data and earnings season can broaden the tape or whether September will finally deliver the correction that many have been bracing for. 

On positioning, retail investors’ cash allocations fell to just 16.5% in August, the lowest in four years, while institutional cash balances are down to 3.9%, one of the lowest levels in over a decade. That leaves little dry powder if markets falter.

Sector rotation dominated Wednesday’s flows. Energy rose another 1.3% as crude pushed higher, with discretionary and utilities also positive. Real estate and materials led the decliners, reflecting pressure from higher yields and slower growth expectations. 

Small caps, which briefly outperformed at the open, ended the day under pressure, with the Russell down 0.9% versus the S&P’s 0.3% loss. 

Earnings expectations remain a bright spot, analysts see Q3 earnings up 7.7% y/y, with tech once again the standout at 20%+ growth, and semis expected to post gains closer to 45%. That strength has so far kept investors comfortable with valuations, but the lack of breadth and elevated multiples leave the setup fragile. 

Housing data underscores the bifurcation: new home sales surged 21% in August to 800k, the fastest pace since 2022, but existing sales are expected to decline again when reported today, reinforcing how affordability pressures remain a drag on the broader housing market.

Fed messaging remains fractured. Powell struck a cautious middle ground earlier this week, emphasizing that policy is still modestly restrictive but warning there is no “risk-free path” forward. He avoided committing to additional cuts, frustrating the most dovish corners of the market. 

Governor Bowman was more explicit, warning that the Fed risks falling behind the curve and calling for more decisive easing. By contrast, Atlanta’s Bostic and Chicago’s Goolsbee leaned hawkish, highlighting the risk of reigniting inflation if the Fed moves too quickly. This split has markets clinging to incoming data, PCE tomorrow and labor market indicators in the coming weeks, as the tiebreaker for whether cuts in October and December remain on the table.

Internationally, the Swiss National Bank opted to hold rates at zero after six straight cuts, pointing to tariff-driven downside risks to growth. The franc weakened modestly on the decision, and Swiss equities slipped. In Europe, ECB officials continue to walk a tightrope between slowing growth and energy-related inflation pressures, while BOJ policy chatter has kept the yen volatile. 

Traders are also weighing historical context: MarketWatch highlighted that equities near highs often stumble after Fed cuts, as investors question whether easing reflects underlying weakness. However, this cycle could diverge, with AI-driven earnings momentum and resilient consumer spending providing a stronger backdrop than in past post-cut periods.

Geopolitics is once again front and center. Trump’s pivot on Ukraine, declaring Kyiv could win back all its land “with EU help,” has rattled European capitals. After months of signaling support for a land-for-peace deal, this new line is seen less as an embrace of Ukraine and more as a handoff of responsibility. EU officials worry Trump is setting an impossible bar, effectively preparing to blame Europe if Kyiv falters. 

Coupled with calls for an embargo on Russian oil and 100% tariffs on Chinese and Indian energy imports, the burden shift looks designed as much for political cover as strategic clarity. For markets, the signal is clear: more NATO weapons, more uncertainty around energy supply, and a widening transatlantic divide.

Elsewhere, Argentina secured an extraordinary pledge of U.S. support, with Treasury Secretary Bessent outlining a $20 billion package of swap lines and bond purchases to backstop President Milei’s reform agenda ahead of next month’s elections. The peso firmed on the news, but critics warn Washington may now be on the hook for an open-ended bailout. Research out this week also underscored how Trump’s tariff push interacts with global currency dynamics. Economists pegged 26% as the tipping point where the dollar’s safe-haven status could be compromised, but with current average tariff rates near 17–18%, the U.S. retains its “exorbitant privilege” — albeit with more cracks than before. Investors will be watching closely for signs of slippage in dollar demand if trade barriers climb further.

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Shutdown risk is climbing fast. With funding set to expire September 30, the White House has instructed agencies to prepare for furloughs and job cuts. Trump is framing the fight as leverage on immigration and spending caps, raising the stakes and narrowing paths for compromise. Market impact has so far been muted, but the closer Congress gets to the deadline, the more traders will need to account for disruption in economic data releases and federal spending.

Meanwhile, the legal and regulatory drumbeat continues. Former FBI chief James Comey was indicted, adding political theater at a delicate time. And in health policy, RFK Jr. and Trump grabbed headlines by linking Tylenol to autism at a White House press conference. Kennedy’s advisers had wanted to highlight leucovorin, a promising therapy, but Trump relished the chance to frame acetaminophen as the culprit. The move stunned much of the medical establishment, with professional societies warning against fear-driven messaging. 

Still, the White House is positioning this as fulfilling a campaign pledge to tackle autism rates, underscoring how health policy is becoming an extension of Trump’s broader populist messaging. For investors, the key takeaway is rising uncertainty in regulatory frameworks, whether in healthcare, tech, or energy, as policy is increasingly set by political narrative rather than consensus.

Markets are entering a holding pattern, with the PCE print now the next major catalyst. Breadth remains alarmingly narrow, with the AI trade doing the heavy lifting, while cash allocations at multi-year lows leave little margin for error. 

Energy executives are openly warning that Trump’s push for low oil prices and aggressive tariff policy is creating “chaos” for shale economics, adding another layer of tension to a sector that’s been the market’s best performer in recent weeks. 

Abroad, Argentina’s bailout, Europe’s Ukraine unease, and questions around the dollar’s reserve status all point to a world more fragmented and less predictable. 

For traders, the setup is clear: the trend remains up, but risks are stacking quickly, and tomorrow’s inflation data could be the first true test of whether momentum can hold.