Following the Federal Reserve's decision to keep interest rates unchanged, the yield on inflation-sensitive 30-year U.S. bonds spiked to a 19-year high. This movement reflects market expectations of higher interest rates despite the Fed's pause, with bond investors effectively tightening financial conditions on the central bank's behalf. The Fed's "hawkish hold," where rates remained in the 3.50%-3.75% range but with three dissenting votes favoring a hike, suggests future rate increases are still on the table, creating uncertainty for both stocks and bonds.
In the tech sector, earnings reports presented a mixed picture. Microsoft's shares rose after its cloud unit showed the fastest growth in four years, signaling a positive return on its substantial AI infrastructure investments. Conversely, Meta Platforms Inc. saw its stock drop by 9.3% after delivering a disappointing revenue forecast and increasing its anticipated 2026 capital expenditure to between $130 billion and $145 billion, from a prior forecast of $125 billion to $145 billion. This increase in spending raised concerns about the impact on free cash flow.
The broader market reacted with volatility. The S&P 500 fell 1.5%, hitting its lowest level in a month, while the tech-heavy Nasdaq Composite declined 1.74% and entered a technical correction, extending its slide to 11% from its June record high. The Nasdaq 100 index also dropped 2.1% as investors offloaded AI-related stocks amid concerns over heavy capital spending. Despite the S&P 500 trading at about 20 times expected earnings, just above its 10-year average of 19, the market remains wary of persistent inflation and potential future rate hikes, which analysts believe could be corrosive for returns.
