Can Nasdaq and Russell reach new highs?

Key findings

• S&P 500 hits record high after Fed rate cut sparks market rally
• Upcoming economic data, especially PCE, could test the market’s reaction to future rate cut forecasts
• Strong market momentum continues, but falling earnings expectations signal potential caution for investors

Stocks ended last week higher, with the S&P 500 and Nasdaq Composite each up about 1.5%. It was a record closing high for the S&P 500. The big winners of the week, however, were small-cap stocks. The Russell 2000 gained 2.3%, and while it didn't make a new closing high, it's within reach.

Last week's catalyst was the Federal Open Market Committee's (FOMC) decision to cut interest rates by 50 basis points. That decision was greeted with a massive rally on Thursday, but as I discussed in my column last Friday, history has not been kind to rate cuts of this magnitude to kick off a rate-cutting cycle. It's like eating a great meal and then realizing you're allergic to half the ingredients. History notwithstanding, I also believe the Fed's forecast of two more rate cuts this year could cause markets to become increasingly sensitive to economic data. We'll have a chance to put that theory to the test this week.

This week's economic calendar includes speeches from Fed members every day. In addition, this morning we get the latest manufacturing and services purchasing managers index (PMI) data. While there are more economic reports due throughout the week, the most important report comes on Friday when the latest personal consumption expenditures (PCE) data is released. I'm particularly interested in this report because of the Fed's interest rate forecasts that I mentioned above.

If Friday's PCE report is in line with or even below forecasts, then the predictions for further rate cuts make sense. However, if the report is positive, then I think it could create skepticism about those cuts. Therefore, I believe markets may become increasingly sensitive to economic data.

One of the more encouraging aspects of late has been the number of stocks showing strength. Over 75% of stocks in the S&P 500 are trading above their 50-day and 200-day moving averages. But there are also reasons for caution. Third-quarter earnings are expected to be 4.6% higher than last year, according to FactSet. That figure is down from late June, when earnings were forecast to rise 7.8%. That's a pretty significant drop from expectations, especially considering that the price-to-earnings ratio for the next 12 months is 21.4, well above its historical average.

There are a few individual stocks I'll be keeping an eye on this week, starting with Intel. According to the Wall Street Journal and Bloomberg, there are rumors that Qualcomm may be interested in buying Intel, or that Apollo Global Management may invest as much as $5 billion in the struggling company. Intel shares, once the leader in the chip space, have fallen about 60% this year. While any acquisition is likely to attract regulators' attention, U.S. regulators may also see it as a way to cement U.S. dominance in a highly competitive space.

I'm also keeping an eye on a few companies that have to report earnings this week, including KB Homes, Micron, CarMax and Costco. For KB Homes and CarMax, I'm curious to see how lower interest rates might affect their prospects. Micron is of interest because of the ongoing interest in artificial intelligence. Finally, Costco's results could shed light on how consumers are spending their money.

While Friday's close today wasn't what I'd call spectacular, let's see if the markets as a whole can build on last week's momentum. With the S&P 500 hitting new highs, I'd like to see the Nasdaq and Russell follow suit as well. Some particular stocks worth mentioning include Palantir. This stock was downgraded to neutral by an analyst at Citi. Palantir's shares have been soaring since the announcement that it would be joining the S&P 500. I'm also curious to see how Amazon shares react to the news that employees will be asked to return to the office five days a week. In particular, I'm wondering if the trend of getting people back to the office is affecting online shopping trends. I'm also watching closely for any reaction to this morning's PMI reports. And finally, I'm watching both gold and silver. Gold has hit new all-time highs, and I'm curious to see if silver can follow suit. As always, I would stick to your investment plans and long-term goals.

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