Wall Street’s Hopes for Rate Cuts Dashed as Fed Keeps Rates Unchanged

Wall Street’s hopes for imminent interest-rate cuts went mostly unfulfilled on Wednesday, sending stocks and bonds lower to cap an otherwise bumper month for risk assets. Copper tumbled as President Donald Trump’s tariffs excluded the refined metal.

An initially calm reaction in markets was broken when Fed Chair Jerome Powell told reporters that no decision has been made about easing policy in September. The US labor market ‘looks solid,’ he said, while inflation remains above target, statements traders interpreted as working against the case for an imminent policy move.

Equities erased gains, with the S&P 500 down 0.4%. Treasury two-year yields climbed seven basis points to 3.94%. While the concerted pullback in stocks and bonds looked mild, it marked the worst Fed day since December. The dollar rose for a fifth straight session, the longest advance since February.

Despite Trump’s calls for an immediate rate cut, investors in risk assets have largely tempered expectations for a Fed pivot anytime soon. Instead, they’re leaning on resilient economic growth, an AI-fueled earnings boom, and the belief that tariffs will only trigger manageable goods inflation while leaving services inflation contained.

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Focus Shifts to AI-Fueled Earnings Boom

Earnings season for a handful of megacap tech firms has morphed into capex season with the AI arms race showing no signs of slowing. Focus will be on how much the behemoths Microsoft Corp. and Meta Platforms Inc. plan to dish out to keep up with competitors like Alphabet Inc. and Amazon.com Inc. as they build out infrastructure and software to power artificial intelligence applications.

The S&P 500, coming off its best streak of gains since 2020, is about to enter what has historically been its toughest stretch of the year. Over the past three decades, the benchmark has performed the worst in August and September, losing 0.7% on average in each month, compared with a 1.1% gain on average across other months, data compiled by Bloomberg show.

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Market Outlook: Seasonal Weakness Ahead

Though equities have likely not peaked this year, we see limited upside given the historically high multiples at which market-leading stocks are trading, according to Chris Brigati at SWBC. ‘We are entering a seasonal period of weakness for the market suggesting a fall pullback may be on the horizon before the next move toward higher stock prices in 2026,’ he said.

The US stock rally has been fueled by retail traders, while institutional buying has been more measured, according to Barclays Plc strategists led by Emmanuel Cau. Wells Fargo Investment Institute is raising its year-end forecasts and target ranges for US equities this year and next, saying tariff delays and deregulation are poised to keep driving the stock market higher.

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Key Market Moves

The S&P 500 fell 0.4% as of 3:32 p.m. New York time. The Nasdaq 100 fell 0.1%. The Dow Jones Industrial Average fell 0.6%. The MSCI World Index fell 0.5%. The Bloomberg Dollar Spot Index rose 0.7%. The euro fell 1.1% to $1.1424. The British pound fell 0.8% to $1.3238. The Japanese yen fell 0.6% to 149.39 per dollar. Bitcoin fell 0.9% to $116,450.45. Ether fell 1% to $3,725.33. The yield on 10-year Treasuries advanced five basis points to 4.37%. Germany’s 10-year yield was little changed at 2.71%. Britain’s 10-year yield declined three basis points to 4.60%. The yield on 2-year Treasuries advanced seven basis points to 3.94%. The yield on 30-year Treasuries advanced four basis points to 4.89%. West Texas Intermediate crude rose 1.4% to $70.21 a barrel. Spot gold fell 1.7% to $3,271.31 an ounce.