Stocks Lower on Potential for More Rate Hikes

The Federal Reserve left its main lending rate unchanged Wednesday, but its concerns about inflation and apparent willingness to take rates higher later this year—and leave them there longer—weighed on stocks. All the major equities benchmarks were lower, with the S&P 500^® Index (SPX) and Nasdaq Composite (COMP) touching three-week lows.

The Federal Open Market Committee (FOMC), the Fed's rate-setting arm, concluded its two-day meeting earlier Wednesday by keeping its funds rate at a 5.25% to 5.50% target range. That came as no surprise, but Fed Chair Jerome Powell's post-meeting remarks appeared to unnerve investors who were hoping rates would go no higher.

"Inflation remains significantly above our 2% objective," Powell said. While the economy is facing headwinds from tighter credit conditions for households and businesses, and nominal wage growth has shown some signs of easing, "labor demand still exceeds the supply of available workers," he said. "We're prepared to raise rates further, if appropriate."

Here is where the major benchmarks ended:

• The S&P 500 Index was down 41.75 points (0.9%) at 4,402.20; the Dow Jones Industrial Average (DJIA) was down 76.85 points (0.2%) at 34,440.88; the Nasdaq Composite was down 209.06 points (1.5%) at 13,469.13.
• The 10-year Treasury note yield (TNX) was up about 3 basis points at 4.393%.
• Cboe's Volatility Index (VIX) was up 1.03 at 15.14, after touching a two-week high.

Communication services and technology were among the weakest sectors Wednesday, with the Philadelphia Semiconductor Index (SOX) falling to its lowest level since late May. Regional banks were also lower, and energy stocks slipped after crude oil futures pulled back from a recent rally. Real estate and consumer staples posted modest gains. The U.S. Dollar Index (DXY) strengthened back toward a six-month high.

Stocks on the move

The following companies had stock price moves driven by quarterly earnings, analyst ratings, or other news:

• Build-A-Bear Workshop (BBW) rose 4% after DA Davidson initiated coverage of the stuffed-animal retailer with a "buy" rating, citing beliefs the company is an underappreciated small-cap growth candidate.
• Coty (COTY) rose 5% after the cosmetics maker boosted its full-year outlook for 2024, citing momentum in fragrances at its prestige brands, which include Burberry and Gucci.
• Bausch Health (BHC) rose 8% after Jefferies upgraded the pharmaceutical stock to "buy," citing expectations potential legal victories will increase clarity for the company's Bausch + Lomb (BLCO) spinoff.
• Dollar General (DG) shook off an early drop after JPMorgan downgraded the discount chain to "underweight" from "neutral" because of concerns about consumer spending. Dollar General ended about 0.7% higher.
• General Mills (GIS) rose slightly after the maker of Cheerios and other breakfast foods reported quarterly results that were slightly above Wall Street expectations and reiterated its outlook for fiscal 2024.
• Goldman Sachs (GS) fell 1.35% following a Wall Street Journal report the big bank is in advanced talks to sell lending platform GreenSky to a group of investment firms that includes KKR (KKR), Sixth Street, and Pacific Investment Management.
• Instacart (CART) fell 11% a day after its stock market debut, which saw the grocery delivery service's stock's jump nearly 16%
• Klaviyo (KVYO) rose 1.8% after the marketing automation company held its NYSE initial public offering (IPO).
• Pinterest (PINS) rose 3.5% after the company's management said it expects year-over-year revenue growth to accelerate following a slowdown in 2022 and 2023. Both Citi and D.A. Davidson upgraded Pinterest to "buy" and increased their price targets.
• Steelcase (SCS) shares jumped 19% after the furniture company reported quarterly results that topped Wall Street's expectations and released strong full-year and third-quarter earnings forecasts, based on expectations more people will be returning to offices.

Among other companies, KB Home (KB) is expected to report quarterly results after Wednesday's close.

Fed projection

In his press conference, Powell noted that economic activity had been stronger than expected and acknowledged that the Fed's historically aggressive policy-tightening efforts of the past 18 months had helped bring down inflation from its peaks of last summer.

Still, the Fed wants to see "convincing evidence that we've reached the appropriate level" for rates, Powell added. "We've seen progress" toward lowering inflation closer to the Fed's 2% long-term target, "but need to see more. We're fairly close, we think, to where we need to get."

An FOMC statement released following the end of the meeting "contained very few changes but left the door open for additional hikes this year," Schwab Center for Financial Research analysts say in a report, noting that the Fed's statement retained some wording from previous post-FOMC meetings, specifically the reference that "additional policy firming that may be appropriate."

The Fed "is watching the labor market and inflation closely, and both are moving in the right direction but not where the Fed wants them to be yet," the analysts add.

The Fed's "dot plot" update further reinforced prospects for one more rate this year, followed by two cuts in 2024, which was two fewer than indicated during the last update in June. That would put the funds rate around 5.1%.

Despite the potentially hawkish tone of the FOMC statement and Powell's remarks, investors are relatively confident the Fed is about done raising rates.

Late Wednesday, investors were pricing in a 73% implied probability the Fed will hold rates at the current level following its next FOMC meeting, which ends November 1, based on the CME FedWatch Tool. That's up from 70% Tuesday and 57% a week ago.