US stocks bounced back Thursday, erasing the prior session's losses, as traders questioned whether Federal Reserve Chair Kevin Warsh will follow through on raising interest rates after the central bank's July meeting.
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S&P 500 rebounds 1.2% from Fed selloff as rate-hike doubts grow
US stocks bounced back Thursday, erasing the prior session's losses, as traders questioned whether Federal Reserve Chair Kevin Warsh will follow through on raising interest rates after the central bank's July meeting.
The S&P 500 rose 1.2% to 5,847, recovering all of the ground lost Wednesday when the index dropped 1.8% after the Fed held rates steady but opened the door to a September hike. The Dow Jones Industrial Average gained 0.9% to 42,136, while the Nasdaq Composite climbed 1.6% to 18,924, led by a rebound in megacap technology shares.
"The market is pricing in a hike, but the data doesn't demand one — and traders are betting Warsh blinks," said Michael Gapen, chief US economist at Morgan Stanley. "The labor market is cooling, and the disinflation trend, while slow, remains intact."
Nine of the 11 S&P 500 sectors finished in positive territory. Information Technology led the rally with a 2.1% gain, followed by Communication Services at 1.8% and Consumer Discretionary at 1.5%. Energy was the worst performer, sliding 0.7% as crude prices retreated, while Utilities edged down 0.2%. The Cboe Volatility Index fell 1.8 points to 18.3, retreating from the 21 handle touched during Wednesday's selloff.
The Fed decision that triggered the selloff
Wednesday's Federal Reserve statement held the federal funds rate at 5.25% to 5.5%, as widely expected, but the accompanying dot plot showed a median projection for one quarter-point hike by year-end. Markets had previously priced no further tightening. Cleveland Fed President Beth Hammack said in a LinkedIn post that business leaders have been asking the central bank "to take action to curb inflation," adding that price pressures are "broad based."
Traders responded by pricing a 72% probability of a hike at the September meeting, according to Bloomberg data, with a second move fully priced by March 2027. The two-year Treasury yield surged 12 basis points Wednesday to 4.58%, before settling back to 4.49% on Thursday as the equity rebound took hold.
Oil slides despite Middle East tensions
Brent crude fell 1.4% to $97.80 a barrel Thursday, retreating from the $100 threshold breached last week, even as geopolitical risks in the Middle East showed no signs of abating. The Houthis attacked two Saudi Arabian vessels in the Red Sea last week, and Iran's deputy foreign minister said Thursday that Tehran has "never requested negotiations with the US," damping hopes for a diplomatic resolution.
The divergence between rising geopolitical risk and falling oil prices suggests traders are increasingly focused on demand concerns. The US dollar index edged down 0.2% to 104.1, providing additional support for risk assets, while gold rebounded 1.5% to $2,385 an ounce after a brutal selloff earlier in the week.
The rebound sets up a critical test for the S&P 500, which now sits just 2% below its all-time high. With Big Tech earnings from Microsoft, Meta, Apple and Amazon now in the rearview mirror, and the Fed's September meeting looming, the next catalyst for direction may come from August's consumer price index report, due Aug. 13.
This article is for informational purposes only and does not constitute investment advice.
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