Week Ahead: After a Record-Setting Week, a Key Inflation Report Will Decide the Market’s Next Move
The stock market is riding high on a wave of optimism, but it’s heading straight for a reality check. After the Federal Reserve’s “hawkish” rate cut sent stocks and bonds in opposite directions, the stage is set for a pivotal week where one number could decide the market’s next big move: the Personal Consumption Expenditures (PCE) inflation report, due out Friday.
This is the Fed’s preferred measure of inflation, and it will be the ultimate arbiter in the debate that defined last week’s trading. Will the data be cool enough to justify the stock market’s celebration and force the Fed into a more dovish stance? Or will it come in hot, validating the bond market’s skepticism and putting the new rally in jeopardy?
Here’s what to watch in the week of September 22, 2025.
What to Watch This Week
- The Main Event: Friday’s PCE Inflation Report: A cool number would be a green light for stocks, suggesting the Fed has room to keep cutting rates. A hot number would throw cold water on the rally, validating the Fed’s cautious stance and forcing investors to reconsider the path of monetary policy.
- Listen to the Fed: With the post-meeting blackout period over, a number of Fed officials are scheduled to speak. Traders will be parsing every word for any hint of a stronger dovish or hawkish tilt within the committee, which could spark volatility.
- Will the Rally Broaden?: The recent advance has been famously narrow, driven by a handful of mega-cap tech stocks. Watch the performance of the S&P 500 Equal-Weight Index. If it starts to catch up to the main index, it’s a sign that the rally’s foundations are getting stronger.
The Market’s Big Debate: Why Last Week Left Investors Divided
To understand what’s at stake, you have to look back at the conflicting signals that emerged last week. Here is the setup, and the two competing arguments that are now driving the market.
Setting the Stage
Coming into the week, investors were almost certain the Federal Reserve would cut interest rates. The debate wasn’t about if they would cut, but about the message that would accompany the decision. The news aligned with expectations, as the Fed delivered the anticipated 25-basis-point cut. However, the context provided by Fed Chair Jerome Powell was more “hawkish” than many optimists had hoped for. A hawkish stance means being more concerned about inflation and less inclined to cut rates aggressively. Powell described the move as a “risk management” adjustment rather than the beginning of a sustained easing cycle, pointing to forecasts of stubborn inflation.
Despite this cautious tone, the stock market ultimately chose to focus on the tangible rate cut, powering the rally into the end of the week. This created a sharp divide between the bulls and the bears.
The Debate (The Bull vs. Bear Case)
The Bull Case (The Optimistic View): Optimists believe the Fed’s rate cut is a clear green light for investors. The core belief is “don’t fight the Fed“; any move toward easier monetary policy, no matter how small, is seen as supportive for stock prices. Bulls point to the continued strength of the American consumer, evidenced by strong retail sales data, and a labor market that is cooling but not collapsing.
Furthermore, the powerful AI narrative was supercharged by the Nvidia-Intel partnership. Proponents of this view believe that innovation in AI will continue to drive corporate profits and stock gains, overpowering broader economic concerns. The decision by FedEx to reinstate its full-year outlook is also cited as evidence of underlying economic health.
The Bear Case (The Cautious View): On the other hand, cautious voices point to several warning signs beneath the surface of the record-setting rally. The most significant is the divergence between stocks and bonds. While stocks rallied, the 10-year Treasury yield rose, suggesting bond investors are taking the Fed’s hawkish warnings about inflation more seriously.
This camp is also concerned about the rally’s “narrow breadth,” meaning the market’s gains are heavily dependent on a few mega-cap tech stocks like the “Magnificent Seven,” while the average stock is not participating. This makes the market vulnerable if those key stocks falter. Bears also highlight the sharp downturn in the housing market and weak reports from companies like Darden Restaurants and Lennar, suggesting that high rates are causing real pain. Finally, the low Cboe Volatility Index (VIX) reading suggests a high degree of investor complacency, which can often precede a market downturn.
A Two-Track Economy
Economic data pulled in two different directions. A surprisingly strong August retail sales report showed the American consumer is still spending freely. But this was completely contradicted by a dismal August housing starts report, which plunged as high mortgage rates continue to crush the construction industry. This divergence highlights the Fed’s central dilemma: how to support the interest-rate-sensitive parts of the economy, like housing, without reigniting consumer-driven inflation.
Disclaimer: This article is for informational purposes only and does not constitute financial, investment, or legal advice. The information provided is a synthesis of publicly available data and expert analysis and should not be considered a recommendation to buy or sell any security. Investing in the stock market involves risk, including the possible loss of principal. Past performance is not indicative of future results. Readers should consult with a qualified financial advisor to determine an investment strategy that is suitable for their own personal financial situation and risk tolerance.
