U.S. stocks experienced a downturn on Wednesday, with the S&P 500 falling 0.8% and the Dow Jones Industrial Average dropping 348 points, or 0.7%. The Nasdaq composite was down 1.3%. This decline was largely attributed to a rebound in oil prices and a surprisingly strong report on U.S. business activity, which heightened concerns about inflation. The price of Brent crude oil rose 3.2% to $102.44 per barrel, reversing a recent decline. West Texas Intermediate (WTI) crude also gained 1.81% to reach $92.16 per barrel.
The surge in oil prices and robust business activity report pushed bond yields higher. The yield on the 10-year Treasury jumped to 5.12% from 4.96% the previous day, reaching its highest level since 2007. This increase in borrowing costs negatively impacts stock prices and can slow economic growth. According to Chris Williamson, chief business economist at S&P Global Market Intelligence, the business activity report also indicated that costs for businesses are rising at the fastest rate in four years, partly due to more expensive fuel. This suggests potential for businesses to pass these costs onto consumers, exacerbating inflation.
Market sentiment was further impacted by increasing expectations of further interest rate hikes by the Federal Reserve. Traders now estimate a greater than 50% probability that the Fed will raise its federal funds rate at its next two meetings in October and December, according to data from CME Group. This contrasts with earlier hopes for a diplomatic breakthrough regarding oil flows through the Strait of Hormuz, which had previously caused oil prices to fall. However, recent talks between U.S. and Iranian officials have yielded no concrete progress, dampening optimism and contributing to the rebound in oil prices.
Several companies reported earnings, with mixed reactions. KB Home announced stronger-than-expected profits but saw its stock fluctuate, eventually falling 0.8%, as its executive chairman noted tougher conditions in the housing market. General Mills also reported stronger profits than anticipated, despite higher costs eroding its profit margins. However, the company's stock fell 0.8% as it projected growth for the fiscal year to be below its historical track record due to a "challenging consumer backdrop" and did not raise its full-year profit forecast.
Other notable movements included Disney+ announcing a 13% price hike, raising its monthly cost to $21.49. McDonald's shares fell to four-year lows after the company indicated challenges in its U.S. business. Microsoft was upgraded by Stifel, while Chinese AI stocks, including Alibaba Group, saw declines after reports of a data security probe by regulators.
