US stocks advanced on Wednesday as a cooler-than-expected inflation reading eased concerns that the Federal Reserve could raise interest rates again in October. The S&P 500 and Nasdaq were also on track to record their second consecutive quarterly gains, underscoring the importance of inflation and monetary policy expectations for equity valuations.

Cooler PCE Inflation Changes the Rate Outlook

The US Commerce Department reported that the Personal Consumption Expenditures Price Index rose 3.4% year over year in August, below the 3.7% increase expected by economists polled by Reuters. The reading provided financial markets with evidence that inflationary pressures were not accelerating as quickly as previously anticipated.

The PCE index is closely monitored by the Federal Reserve as a measure of consumer-price pressures. A softer reading can reduce expectations for additional monetary tightening, potentially supporting valuations for equities and other assets that are sensitive to borrowing costs.

The market response was reflected in the major indexes. The Dow Jones Industrial Average declined 0.28%, while the S&P 500 advanced 0.36% and the Nasdaq gained 0.86%. The stronger performance of the Nasdaq reflected the sensitivity of technology and growth stocks to changes in interest-rate expectations.

Economic Growth Remains Resilient

At the same time, the inflation data did not signal a significant deterioration in economic activity. The final reading for second-quarter US GDP was revised upward to a 2.2% annualized rate, supported by solid consumer spending and investment.

Investment associated with the rapid expansion of AI infrastructure also contributed to economic activity. The combination of continued growth and moderating inflation creates a more complex environment for policymakers because it provides less immediate evidence of an economic slowdown that would require substantially easier monetary policy.

For equity markets, resilient economic activity can support corporate earnings expectations, while moderating inflation can reduce pressure on interest rates. The interaction between those two forces remains important for determining how investors value technology companies and other growth-oriented assets.

September Gains Put Markets on Track for Another Strong Quarter

The latest gains put the S&P 500 and Nasdaq on course to finish September with monthly advances and to record their second consecutive quarterly gains. The performance comes despite ongoing uncertainty surrounding inflation, monetary policy and geopolitical developments that have contributed to volatility across global markets.

For investors in Israel and global markets, the next stage will depend on whether the softer inflation trend continues while economic growth remains resilient. Future PCE readings, employment data, Treasury yields and Federal Reserve policy signals will remain important indicators for assessing the probability of further rate increases. At the same time, the contribution of AI-related investment to US growth will remain a significant factor as markets evaluate whether strong technology-sector spending can continue supporting economic activity and corporate expectations.