By Linh Tran, Market Analyst at XS.com

The Dow Jones (US30) has maintained its upward momentum since April this year, and since the final week of August, after surpassing its previous peak, the index has consistently set new highs as monetary policy, real economic conditions, and corporate earnings quality have gradually aligned in a more favorable direction compared to the first half of the year.

Following the September 18 FOMC meeting, the Fed initiated its first step toward monetary easing with a 25 basis point rate cut while keeping its “data-dependent” message intact. This development has had two simultaneous effects on the index: borrowing costs have peaked, allowing financial conditions to gradually loosen and support valuations; at the same time, the absence of aggressive rate cuts has made the market’s advance more sustainable rather than explosive. In such an environment, the Dow—heavily weighted toward cyclical and value stocks—tends to benefit when real interest rates decline while growth remains positive.

Recent economic data suggests that while the economy has weakened, it continues to sustain mixed performances across sectors without tipping into recession. Manufacturing and services PMIs have softened, reflecting slower demand, while housing has shown resilience, with New Home Sales surpassing expectations, signaling that rate-sensitive sectors are starting to adjust to looser financial conditions.

This week, a series of releases including GDP, weekly jobless claims, and especially the Core PCE Price Index will shape expectations for the Fed’s next rate cut trajectory in Q4. The base case remains that growth will stay moderately positive while inflation continues its downward trend, allowing real yields to stabilize or decline, thereby maintaining support for equities.

In addition, part of the focus will shift toward EPS. Given the sectoral composition of companies within the Dow Jones, profit margins could improve as capital costs decline and expense management tightens—particularly in industrials, consumer staples, and interest rate–sensitive financial services. Thus, any signals reinforcing expectations of a monetary policy pivot toward easing are likely to have a direct and positive impact on equities, especially the Dow.

Although bond yields remain elevated compared to historical averages, signs of cooling, coupled with a lack of breakout momentum for the USD, create conditions for capital to flow back into cyclical sectors. Moreover, share buyback activity is likely to accelerate following earnings season, supported by lower funding costs and strengthened balance sheets in recent quarters. The combination of buybacks, steady dividends, and relatively attractive valuations compared to growth-heavy tech stocks is a structural advantage for the Dow’s sectoral composition.

However, the outlook is not entirely free of risks. The biggest concern is that expectations of easing could be delayed if inflation proves persistent or the labor market re-heats, driving real yields and the USD higher—a combination that often pressures cyclical equities in the short term. Geopolitical risks (Middle East, NATO–Russia tensions) and trade policy uncertainties could also prompt markets to shift back into a more defensive stance, especially after a prolonged rally.

Overall, the medium-term outlook for the Dow Jones remains tilted toward the positive, as financial conditions continue to ease and valuations are more palatable relative to high-growth peers. Nonetheless, the market is at a pivotal stage, with upcoming data providing crucial clues for the Fed’s next moves. Any signals that inflation remains sticky while economic data accelerates could push rate cut expectations further out—or renewed geopolitical flare-ups could trigger a meaningful correction in the Dow before it regains momentum.