Closing Market Update: Lower After Fed Hikes Rates

U.S. stocks initially appeared to take the Federal Reserve’s announcement of an expected quarter-point interest rate increase in stride Wednesday, but then tumbled later in the session after Fed Chair Jerome Powell effectively poured cold water on suggestions the central bank may become less aggressive on inflation any time soon.

Although a post-meeting statement from the Fed’s Federal Open Market Committee (FOMC) was interpreted as a sign the Fed may be near a much-anticipated “pause” in its tightening cycle, Powell indicated in a press conference that rate cuts are unlikely any time soon given that inflation is still running above the central bank’s 2% target rate. With Wednesday’s increase, the Fed’s benchmark is now at a range of 5% to 5.25%.

Inflation “has moderated somewhat since the middle of last year but remains high,” Powell told reporters after the FOMC meeting. Getting inflation down to the Fed’s target “has a long way to go … It will take time, and if [the Fed’s] forecast is right, it wouldn’t be appropriate to cut rates.”

Liz Ann Sonders, Schwab’s chief investment strategist, said that given all this, investors probably shouldn’t be looking for rate cuts in the immediate term.

“The only way the Fed pivots to rate cuts—not just pauses—is either we get more significant deterioration in the economy, or the banking system travails turn into much more of a systemic crisis,” she said. “Absent those two or some combination, take the Fed at its word. Even if the Fed is at its ‘terminal’ rate, they’re going to stay there for a while.”

Collin Martin, director, fixed income strategy at the Schwab Center for Financial Research, noted that the FOMC’s updated statement also suggested a preference to keep rates where they are.

“Given the statement change, the bar for additional rate hikes appears to be relatively high,” Collin said. Still, “we don’t expect the Fed to cut rates this year. With inflation still elevated and the labor market just starting to show cracks, the Fed would likely prefer to keep financial conditions tight for longer to make sure that inflation continues to trend lower toward its 2% target.”

Here’s where the major indexes ended up: 

• The S&P 500® index (SPX) was down 28.83 points at 4090.75.
• The Dow Jones Industrial Average® ($DJI) was down 270.29 (0.8%) at 33,414.24.
• The Nasdaq Composite® ($COMP) was down 55.18 (0.5%) at 12,025.33.
• The 10-year Treasury yield (TNX) was down about 7 basis points at 3.367%.
• The Cboe Volatility Index® (VIX) was up 0.52 at 18.30.

Energy companies were among the market’s weakest performers as crude oil continued a recent decline, with WTI Crude Oil futures (/CL) falling more than 4% under $70 per barrel—a nearly six-week low. Semiconductor and financial shares were also weak. The U.S. Dollar Index ($DXY) dropped sharply in the wake of the Fed announcement before rebounding.

Earnings roundup

While the Fed consumed much of the market’s attention Wednesday, earnings season rolled along, with several big companies reporting results. The following companies reported earnings over the past day:

• Advanced Micro Devices’ (AMD) earnings topped expectations, but the chipmaker’s sales projection for the current quarter, at $5.3 billion, fell short of Wall Street forecasts. The company’s shares fell more than 9%.
• Clorox (CLX) reported earnings of $1.51 per share, nearly $0.30 above expectations, on revenue of $1.91 billion, also above expectations. Profit increased as the company hiked prices for its cleaning products and other consumer brands. Clorox shares rose nearly 5%.
• CVS Health’s (CVS) earnings exceeded expectations as robust pharmacy numbers offset a decline in COVID-19 vaccine testing volume, but the company lowered its 2023 forecast. Its shares fell 3.7%.
• Estee Lauder (EL) reported earnings of $0.47 per share, about $0.04 cents under expectations. The makeup company also lowered its full-year earnings per share (EPS) guidance to $3.29 – $3.39 from a previous outlook for $4.87 – $5.02, citing a slower-than-expected recovery in Asia. Its shares fell more than 17%.
• Kraft Heinz (KHC) beat EPS and revenue expectations and raised its full-year EPS guidance to $2.83 – $2.91 from $2.67 – $2.75 previously, citing strength in its foodservice, emerging markets, and U.S. retail businesses. Its shares rose 2%.
• Ford (F) reported EPS of $0.63, more than $0.20 above the average estimate, and revenue of $39.09 billion, about $3 billion above expectations. The automaker reaffirmed its full-year guidance, including expectations to lose about $3 billion in its electric vehicle business. Ford shares were little changed.
• Starbucks (SBUX) reported adjusted EPS of $0.74, about $0.09 above expectations, and revenue at $8.72 billion, surpassing forecasts for around $8.41 billion. But the coffee chain’s guidance appeared to disappoint investors, as Starbucks shares fell more than 9%.

The rest of the week will be especially heavy with earnings releases, with over 1,900 companies expected to report results Thursday and Friday, according to Yahoo! Finance.

Investors are likely to focus on Apple’s (AAPL) report Thursday, as the company is often seen as a global economic bellwether. Analysts expect Apple to post quarterly EPS of $1.43 on revenue of $92.96 billion, compared with $1.52 and $97.28 billion a year earlier. Anheuser-Busch (BUD) and PG&E (PCG) are also expected to report Thursday.

Jobs data

Investors will also be looking forward to Friday’s Employment Report from the Labor Department, which is expected to show a continued deceleration in hiring as the economy slows. Analysts on average expect nonfarm payrolls to have grown by 180,000 in April, according to Briefing.com. That would be down from 236,000 in March and the lowest monthly figure since December 2020. Monthly payroll growth averaged nearly 400,000 in 2022, according to Labor Department data.

Private-sector payroll numbers released early Wednesday were stronger than forecast but still showed how the Fed’s inflation-fighting efforts have contributed to slowing wage growth. Payroll services company ADP (ADP) reported 296,000 jobs created by the private sector in April, led by gains in leisure and hospitality and more than double the 142,000 analysts expected.

However, wage growth slowed, with pay for “job-changers” gaining 13.2% year over year in April, down from 14.2% in March.

“The slowdown in pay growth gives the clearest signal of what’s going on in the labor market right now,” Nela Richardson, ADP’s chief economist, said in the report. “Employers are hiring aggressively while holding pay gains in check as workers come off the sidelines. Our data also shows fewer people are switching jobs.”