S&P 500 falls as traders brace for half-point hike from the Fed

Stocks were mostly lower on Wednesday as investors braced for the Federal Reserve’s big interest rate decision, where the central bank is widely expected to hike rates by half a percentage point.

The tech-heavy Nasdaq Composite dropped 1.2%, while the S&P 500 dipped 0.4%. The Dow Jones Industrial Average held a gain of 28 points, or 0.1%.

Markets are preparing for a hawkish Fed, and the central bank is also expected to announce a plan to cut its roughly $9 trillion balance sheet by $95 billion a month, beginning in June.

Respondents to the May CNBC Fed Survey indicated they expect the central bank to announce the long-anticipated 50 basis point hike on Wednesday, followed by a second one in June as it looks to cut its balance sheet. The majority of respondents also expect a recession at the end of the tightening cycle, the survey found.

“High inflation constrains the Fed, making easing monetary policy less likely if growth (or markets) fall. We have long argued that elevated inflation would put the Fed in a bind – when growth weakens they would not be willing to or able to ride to the rescue by loosening monetary policy,” Citi quantitative strategist Alexander Saunders said in a note to clients.

This year, stocks have fallen sharply and Treasury yields have spiked, but it is not clear if the market has fully accounted for an aggressive Fed. The benchmark 10-year Treasury yield topped 3% again on Wednesday morning, trading near its highest level since 2018.

“Volatility is likely to continue. Rate hikes have just begun, inflation looks sticky, many geopolitical issues have no obvious offramp, and midterm election rhetoric is just ramping up,” Baird’s Ross Mayfield said in a note to clients this week. “Though the domestic economy has been resilient, corporate earnings are hanging tough, and the US consumer continues to spend, instability–driven by inflation and rates–should continue in the near-term. Have we seen this year’s market low? Possibly not.”

Weakness in some major tech stocks were weighing on the Nasdaq on Wednesday. Shares of Amazon and Netflix fell more than 2% each, while Google-parent Alphabet was off by 1%.

Corporate earnings reports were leading to notable moves on Wednesday. Lyft plummeted 29% after the ridesharing company shared on Tuesday evening weak guidance for the current quarter as it expects to invest in driver supply. Rival Uber dropped 8%.

Elsewhere, chipmaker Advanced Micro Devices also moved higher following its report, gaining about 6%, after beating estimates and delivering strong guidance. Casino stock Caesars Entertainment was under pressure after the company missed estimates on the top and bottom lines.

Airbnb rose 3.6% as the company expects a continued travel rebound, and Starbucks added 2.4% after topping revenue estimates.

Stocks have risen for two straight days to start May, stabilizing ahead of the Fed meeting.

The moves came as the markets attempt to recover from a brutal tech-led April sell-off that saw the Nasdaq hit its worst month since 2008. The Dow and S&P 500 also finished their worst month since March 2020.

“If our ‘no recessions soon’ call is right, then the pattern we have seen so far this year will probably continue: with equities punching lower and then recovering at least partially as long as recession fails to materialize, and the rates and commodity curves continuing to move higher over time,” wrote Jan Hatzius, Goldman Sachs’ chief economist on Tuesday.

The S&P 500 is currently trading in correction territory, down about 12.4% year to date. LPL Financial’s Ryan Detrick pointed out Tuesday the current correction parallels the size and length of previous corrections after World War II.

On the economic front, the private payrolls report from ADP showed an increase of 247,000 for April, well below the 390,000 Dow Jones estimate. The full labor department payrolls report for April is due out Friday.