S&P, Dow Rise as Yields Slip Ahead of Fed Rate Verdict
The S&P 500 and the Dow gained on Wednesday as Treasury yields pulled back ahead of a likely pause in the Federal Reserve’s policy tightening campaign, though concerns over rates staying higher for longer kept investor sentiment in check.
The U.S. central bank is expected to maintain its key rate in the range of 5.25%-5.50% as it concludes its meeting at 2 p.m. ET, with investors focused on Fed economic projections and Chair Jerome Powell’s comments for clues on the outlook for rates and inflation.
Recent economic data has signaled an easing in core inflation, fuelling bets interest rates could have peaked, but a surge in oil prices has clouded the outlook for headline inflation, providing the Fed room to keep rates higher for longer.
Reinforcing the likelihood of a Fed pause, U.S. Treasury yields retreated from their 2007 highs hit in the previous session.
However, megacap growth stocks including Alphabet, Microsoft and Apple lost between 0.7% and 1.6%, weighing on the communication services and information technology sectors. The tech-heavy Nasdaq also gave up its early gains.
“Concerns remain that the Fed is clearly holding policy at what would be considered to be a restrictive level,” said Mark Luschini, chief investment strategist at Janney Montgomery Scott.
“Everybody is watching for any kind of evidence that would suggest that the traction from tight monetary policy is inflicting damage on the economy.”
Financial markets have priced in a 99% chance the Fed will pause rates on Wednesday and a near 71% likelihood the central bank will keep them unchanged in November, according to CME’s FedWatch tool.
In another sign of new market entrants failing to hold on to their strong gains on debut, Instacart lost 5.5% while Arm Holdings was down 4.4%.
Investors are now looking forward to marketing automation company Klaviyo’s debut on the New York Stock Exchange, with the stock last indicated to open between $36 and $38.
The Boston-based company had secured a valuation of $9.2 billion in its initial public offering after pricing the shares above their indicated range.
At 11:47 a.m. ET, the Dow Jones Industrial Average was up 190.38 points, or 0.55%, at 34,708.11, the S&P 500 was up 7.87 points, or 0.18%, at 4,451.82, and the Nasdaq Composite was down 24.00 points, or 0.18%, at 13,654.18.
Pinterest added 4.3% as Citigroup upgraded the image-sharing platform to “buy” from “neutral” and as the firm announced a share buyback of up to $1 billion.
Coty added 5.1% after the CoverGirl parent raised its annual like-for-like sales forecast.
Advancing issues outnumbered decliners by a 3.58-to-1 ratio on the NYSE and a 1.59-to-1 ratio on the Nasdaq.
The S&P index recorded 10 new 52-week highs and four new lows, while the Nasdaq recorded 33 new highs and 140 new lows.
BofA Global Research said on Wednesday it expects the S&P 500 to end 2023 nearly 7% higher than it previously forecast, and that “old economy” stocks on the blue-chip index could benefit as much, if not more, over their new-age tech peers.
The Wall Street brokerage now expects the index to end the year at 4,600 points, higher than its previous estimate of 4,300 and 3.5% higher than its close of 4,443.95 on Tuesday.
The S&P 500 is up 15.7% so far this year, largely driven by a rally in a handful of mega-cap growth stocks such as Nvidia and Meta that have ridden the artificial intelligence (AI) boom.
While the rally has been moderating, BofA remains in “neutral” to “positive” territory on U.S. stocks, with a bias towards equal-weighted stocks, strategists led by Savita Subramanian said.
An equal-weight index assigns uniform weights to each constituent, unlike a market capitalization-based index, like the S&P 500, where bigger companies tend to have an outsized influence. Equal-weighted stocks have less volatile earnings, smaller differences in analysts’ estimates, and are cheaper and less crowded than growth stocks, Subramanian said.
While a “fresh wave of bear narratives around equities have emerged”, BofA says the “old economy”, which includes value stocks - more prevalent in the equal-weighted S&P 500 - could benefit as much as tech and growth.
This has not been priced “as richly,” Subramanian says.
Moreover, not only have equal-weighted stocks “almost always” beat mega-cap stocks in the past nine recovery cycles, but they could help mitigate duration risks when up against safer assets such as bonds, Subramanian noted.
While the S&P 500 is roughly in line with its historical average on an equal-weighted basis, the valuation gap between the top seven stocks and equal-weighted (SPW) stocks is the highest since the 2001 Tech bubble, Subramanian notes.