On July 29, Eastern Time, the Fed released the minutes of its July monetary policy meeting, sending a strong signal of a rate cut. The minutes showed that most members of the Federal Open Market Committee (FOMC) believe that starting rate cuts this year is appropriate as inflation continues to decline and economic data weakens. This dovish stance instantly ignited market sentiment, with all three major US stock indexes rising, and the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite all closing at record highs.

Rate Cut Expectations Heat Up: Shift in Fed's Internal Views

According to the minutes, Fed officials generally agreed that current interest rate levels are sufficiently restrictive, with several members emphasizing that maintaining excessively high rates could cause unnecessary damage to the economy. Although a few hawkish members still called for waiting for more inflation evidence, the overall tone has notably softened compared to earlier. The market interpreted this as a significant increase in the probability of a September rate cut, with the CME FedWatch tool showing the likelihood of a 25-basis-point cut in September rising to 78%.

The meeting also discussed the pace of balance sheet reduction, with some officials suggesting slowing the run-off before starting rate cuts to avoid excessive tightening of liquidity. This further eased market concerns about quantitative tightening, pushing long-term Treasury yields lower, with the 10-year yield falling to 4.12%, a three-month low.

All Three Major US Indices Hit Record Highs: Tech and Cyclical Stocks Surge

Boosted by rate cut expectations, US stocks rallied across the board. By the close, the Dow rose 1.32% to 41,258.36 points; the S&P 500 rose 1.61% to 5,687.49 points; the Nasdaq Composite posted the largest gain, up 2.15% to 19,223.18 points. All three indices hit intraday record highs, with significantly expanded trading volume.

By sector, tech stocks performed strongest. Led by Apple, Microsoft, and Nvidia, the seven major tech giants averaged gains of over 2.5%, with Nvidia soaring 4.8% to lead the Nasdaq. Market analysts believe rate cuts will lower financing costs for tech companies and increase the present value of their future cash flows, directly benefiting high-valuation growth stocks. Meanwhile, interest-rate-sensitive sectors such as real estate investment trusts (REITs) and utilities also rose sharply, reflecting capital’s pursuit of a low-rate environment.

Notably, cyclical stocks were not to be outdone. Among the 11 major sectors of the S&P 500, only energy slipped 0.3%, while all others rose. Financials gained 1.8% on expectations that rate cuts may stimulate loan demand; industrials rose 1.6%, benefiting from expectations of a soft economic landing. This shows that market confidence in the Fed’s policy shift has spread from tech stocks to the broader market.

Economic Data Support: Employment and Inflation Both Cooling

Behind the Fed’s policy shift is a string of recent weak economic data. The preliminary second-quarter GDP released on July 25 showed an annualized quarterly growth rate of just 1.8%, below the market expectation of 2.0%, with the previous quarter’s figure revised down. Meanwhile, the core PCE price index for June rose 2.5% year-over-year, the lowest since February 2023, moving closer to the Fed’s 2% target.

The labor market also showed signs of cooling. Initial jobless claims last week rose to 242,000, above the expected 235,000, marking a third consecutive weekly increase. Analysts pointed out that the loosening labor market gives the Fed more policy space. Andrew Hunter, senior economist at the well-known consulting firm Capital Economics, said: “With both inflation and employment weakening, the Fed has almost no choice but to cut rates as soon as possible.”

How Should Investors Respond? Sector Rotation and Risk Management

As rate cut expectations dominate the market, investors need to adjust strategies. Lower long-term Treasury yields often push capital from defensive sectors toward high-beta sectors, with tech, financials, and consumer discretionary typically benefiting more. Historical experience shows that within three months after the first rate cut, the S&P 500 averages a gain of about 5%, but volatility also tends to increase significantly.

We suggest investors focus on the following directions: First, embrace the “rate cut beneficiary” theme, such as AI and cloud computing leaders in tech, as well as small- and mid-cap growth stocks; second, position in interest-rate-sensitive industries like real estate, utilities, and biotech; third, hedge by increasing holdings of gold ETFs or high-dividend stocks to address potential geopolitical risks.

Moreover, the Fed minutes also mentioned that officials are concerned about trade policies and fiscal deficits. If inflation rebounds later or the economy unexpectedly weakens, the policy path could change. Therefore, investors should closely monitor the Jackson Hole global central bank symposium in late August, where Chair Powell may provide clearer guidance.

Market Outlook: Bull Run Continues or Top Forming?

Rate cut expectations have undoubtedly injected strength into US stocks, but risks cannot be ignored at historic highs. The S&P 500’s forward price-to-earnings ratio has risen to 22.5 times, above the five-year average, and valuations of some tech stocks are near extreme historical levels. If the economy fails to stabilize after rate cuts, the market may experience a “buy the rumor, sell the fact” correction.

Overall, the market performance on July 29, 2026, shows that investors are highly optimistic about the Fed's easing cycle. In the short term, improved liquidity will continue to support risk assets. But in the long run, attention must still be paid to the alignment of corporate earnings growth with macroeconomic resilience. We will continue to track this in subsequent reports.