Wall Street’s rally lost steam on Tuesday as doubts emerged over the likelihood of the Federal Reserve ending its aggressive interest rate hikes. The major indexes closed mixed after starting November with their biggest monthly gain since 1976.

The S&P 500 edged down 0.06% after jumping over 8% last week, its best performance since April 2020. The Dow Jones Industrial Average slipped 0.1% or around 30 points. However, the tech-heavy Nasdaq Composite managed to eke out a 0.3% gain to continue its win streak.

Shift in Sentiment Clouds Outlook After Rate Euphoria

Last week’s stock surge was fueled by growing hopes of the Fed signaling a pause in its rapid rate hikes at its November meeting. But confidence in a rate relief rally waned after hawkish comments from Fed officials.

“There was quite a bit of euphoria at the end of last week on the belief that the Fed is done, the jobs market is slowing, that the U.S. economy is going to experience a soft landing,” said Michael Hewson, chief market analyst at CMC Markets UK. “People have started to become a bit more clear-eyed. There is the risk that the Fed could rise again.”

On Monday, Minneapolis Fed President Neel Kashkari stated the central bank likely needs to continue raising rates to control persistent inflation before stopping. Investors are keenly focused on any clues from Fed officials ahead of the pivotal November meeting.

Focus Turns to Upcoming Economic Data

The shift in market sentiment indicates investors are closely monitoring incoming economic data for signs of slowing growth and easing inflation pressures. Key indicators like October’s consumer price index (CPI) and producer price index (PPI) reports will be scrutinized.

If prices continue to rise, the Fed may be compelled to deliver another 75 basis point rate increase at its December meeting despite hopes of a pause next month. But if inflation shows substantial cooling, it supports the case for the Fed to halt hikes soon to avoid sparking a recession.

Nasdaq Extends Gains While Blue-Chips Stumble

The tech-heavy Nasdaq has led October’s rally, gaining over 3% on Tuesday even as the Dow and S&P 500 pulled back. Investors rotated towards beaten down growth stocks with hopes that peak inflation and stable rates will improve the outlook for the sector.

However, rising Treasury yields kept pressure on stocks that are sensitive to interest rates like utilities and real estate. The benchmark 10-year Treasury yield climbed back near 4.2%, signaling renewed concerns over the Fed’s tightening trajectory.

Earnings Reports Take Center Stage

With the Fed rate policy outlook uncertain, corporate earnings results moved back into the spotlight. Strong reports from companies like Uber, Occidental Petroleum, and Eli Lilly boosted sentiment.

According to Bespoke Investment Group, the 710 companies that reported earnings last week saw a 2.3% gain on average in the trading session after releasing quarterly results. This marks one of the best post-earnings reactions in 20 years.

With nearly 90% of S&P 500 companies reporting, profits are on track to grow by about 2% year-over-year despite high inflation and slowing growth. The overall better-than-feared results support the case for a soft landing rather than severe recession.

Oil Slides Again on Demand Worries

Oil prices tumbled for the second straight session amid renewed concerns over fuel demand as China’s exports and global economic growth slows.

Brent crude futures settled 2.6% lower at $92.65 a barrel, while U.S. West Texas Intermediate crude fell 2.1% to $88.91. Lockdowns in China to contain COVID have severely reduced activity.

Additionally, trade figures showed the country’s exports declined unexpectedly in October highlighting weakening overseas demand. This compounds worries of a potential global recession.

However, China’s stock markets rose after the IMF upgraded the nation’s GDP growth outlook. The IMF forecasts China’s economy will expand by 3.2% this year and 4.4% in 2023.

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The mixed trading shows investors growing more cautious on growth outlooks even as corporate earnings hold up reasonably well. Markets expect the Fed’s policy path and incoming economic data to remain key drivers of sentiment in coming weeks.

Key Takeaways

• Hopes for a Fed pause on rate hikes in November faded after hawkish comments from policymakers like Neel Kashkari.
• The Nasdaq extended October’s rally with a 0.3% gain, while the Dow and S&P 500 pulled back as Treasury yields rose.
• China’s exports fell unexpectedly in October highlighting overseas demand concerns, though GDP forecasts were upgraded.
• Oil resumed its slide with Brent crude settling below $93 a barrel on demand worries.
• Corporate earnings are supporting markets, but anxiety persists over economic growth and the Fed’s next moves.

With uncertainty lingering over future rate hikes, markets seem destined for increased volatility. While stocks search for direction, expect every clue from the Fed and economic indicators to move markets in coming weeks.