Oil prices surged and the stock market’s “fear gauge” spiked as the war between the U.S. and Iran escalated again on Wednesday. Violence in the Middle East continues to impede traffic through the Strait of Hormuz, while even exponential growth for AI-related companies is letting down investors, traders and speculators.
“We’ll be hitting them hard,” President Donald Trump told Fox News after Iran struck a U.S. base in Jordan. “They’re going to get a beating.” The front-month West Texas Intermediate crude oil futures contract was up 7.2% at $84.94 per barrel.
The Cboe Volatility Index (VIX) rose from 18.21 on Tuesday to as high as 20.34 on Wednesday, breaching its “normal” range of 12 to 20 and settling at 20.05.
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more – straight to your e-mail.
Profit and prosper with the best of expert advice – straight to your e-mail.
The July Fed meeting ended where investors, traders and speculators thought it would: with interest rates unchanged for the fifth straight time but central bankers worried about inflation and the energy shock.
The target range for the federal funds rate remains 3.50% to 3.75%. But three voting members of the Federal Open Market Committee (FOMC) dissented from the decision because they favored raising it by 25 basis points.
“Economic activity is expanding at a solid pace,” reads a repeated sentence in a subtly updated but still brief FOMC policy statement, “despite elevated uncertainty that owes, in part, to the conflict in the Middle East.”
Looking for more timely stock market news to help gauge the health of your portfolio? Sign up for Closing Bell, our free newsletter that’s delivered straight to your inbox at the close of each trading day.
As Fed Chair Kevin Warsh said during his press conference, “We’ll be watching inflation data over the period ahead,” but he also said the central bank wouldn’t rely exclusively on any one piece of it.
Acknowledging a steep rise in market-based rates over the last 42 days, the Fed chair noted shocks the economy seems to be absorbing relatively well so far.
By the closing bell, the tech-heavy Nasdaq Composite had shed 1.7% to 24,442, the broad-based S&P 500 was down 1.5% to 7,316, and the blue-chip Dow Jones Industrial Average had declined 2.2% to 51,594.
SKHY leads chip stocks lower again
The earnings calendar is the market’s main focus following an overnight preview from South Korea-based SK Hynix (SKHY, -2.6%). The Nvidia (NVDA, -3.6%) supplier reported 257% top-line growth, as well as a 557% rise for operating profit and a 1,242% earnings increase.
But SK Hynix stock was down 9.6% on its local exchange because it failed to meet high expectations, and trading was halted on South Korea’s KOSPI Index to stem a broader sell-off. The KOSPI closed lower by 6%.
Losses were similar for Nvidia and other semiconductor stocks such as Advanced Micro Devices (AMD, -5.5%), Broadcom (AVGO, -2.8%) and ASML (ASML, -2.0%), with Micron Technology (MU, -9.9%) suffering like fellow memory stock SKHY.
Up now are Meta Platforms (META, -1.3%) and Microsoft (MSFT, -0.7%), with Apple (AAPL, -0.6%) and Amazon (AMZN, -1.8%) to follow on Thursday.
CAT dogged by data center debate
Caterpillar (CAT, -6.9%) was the worst-performing Dow Jones stock on Wednesday after Baird analyst Mircea Dobre cut his rating on the heavy equipment maker from Buy to Hold and reduced his 12-month target price from $1,200 to $900.
Dobre cited rising regulatory opposition to AI data centers due to environmental strains and power grid pressures.
“The ground is shifting in many ways; the recent New York State moratorium on data center construction is the highest-profile example of a bigger (and growing) trend towards regulatory action at state and local level targeting data centers,” the analyst observes. “This raises costs, adds new development approval hurdles, limits site availability, and likely slows future investment.”
Caterpillar is scheduled to report second-quarter results before the opening bell next Tuesday, August 4. Wall Street expects to see earnings of $6.20 per share (+31.4% year over year) on revenue of $19.17 billion (+15.7% YoY).
CAT hit new all-time intraday and closing highs on June 30. The industrial stock is down 20.9% since then, shedding more than $100 billion in market cap.
What the 2-year Treasury yield says about a rate hike
According to LPL Financial Chief Technical Strategist Adam Turnquist, markets have adjusted to a “higher-for-longer” environment, with the 2-year Treasury yield up about 90 basis points from its February 27 low of 3.375% and outside the target range for the federal funds rate since April.
Turnquist describes eight periods since the 1980s during which the 2-year yield was above that range while policy was on hold, defined as at least three months without a change in the fed funds rate, along with a “crossover period” of at least 20 consecutive trading days.
“As of July 28, 2-year yields have remained above the fed funds target rate for 68 trading days,” Turnquist notes, “with the spread reaching a maximum of 0.60% so far.”
The median maximum spread for the comparison period was 0.97%. And Turnquist concedes the limited nature of the historical data set means it can’t be used to either confirm or rule out a rate hike.
Still, he concludes, “The comparison suggests the current crossover is less mature than the three completed historical signals that ultimately preceded tighter monetary policy.”