US stock futures edged higher on Wednesday despite growing expectations that the Federal Reserve will raise interest rates, potentially marking the beginning of a new rate-hiking cycle over the coming months. S&P 500 futures were up 0.2%, while Nasdaq-100 futures gained 0.4%. Futures linked to the Dow Jones Industrial Average climbed 77 points, or 0.2%, ahead of the Fed's policy decision.
Markets were pricing in a 25-basis-point rate hike on Wednesday with a 92.5% probability, according to the CME FedWatch tool. Investors are also assigning a 45% probability to another quarter-point hike at the Fed's October meeting and a 30% probability of a December hike. The current target rate range stands at 3.5%-3.75%.
The relatively positive tone in US stock futures, despite the near certainty of a rate hike, comes against a backdrop of persistent inflation and elevated energy prices. Here are three reasons why equities are holding up ahead of the Fed decision.
Also Read | Layoffs Are Rising In Tech, But These Skills Are Helping People Unlock Better Pay
Buy-On-Dips Sentiment
The first factor supporting US equities is the willingness among investors to buy stocks after recent declines. US stocks came under pressure on Tuesday, with the S&P 500 falling 0.45% and the technology-heavy Nasdaq Composite declining 0.78%. The pullback has provided investors with an opportunity to step in at lower levels, particularly in areas that have seen strong structural demand.
The fact that futures are trading higher after Tuesday's selloff suggests that some investors are treating the decline as an opportunity to accumulate stocks rather than aggressively reducing exposure ahead of the Fed decision.
ALSO READ: S&P 500 To Tumble 10% After Fed Hike? Here's What History Suggests
However, the strategy comes with risks. Inflation remains elevated, with the Consumer Price Index rising 3.4% in August from a year earlier, although that was down from the recent high of 4.2% recorded in May. Monthly CPI increased 0.4%, in line with expectations, while core CPI rose 0.3%, slightly more than expected.
Markets Are Looking For Clarity
The second reason is that investors may be positioning ahead of greater clarity on the Fed's rate path.
While a 25-basis-point hike is largely priced in, uncertainty remains over what comes next. Markets are currently assigning a 45% probability of another hike in October and 30% in December.
The Fed's statement and Chair Kevin Warsh's guidance will therefore be closely watched for signals on whether Wednesday's move is a one-off adjustment or the beginning of a sustained tightening cycle. A clearer outlook could help reduce some of the uncertainty currently weighing on risk assets. Investors are likely to focus not only on the rate decision but also on the Fed's assessment of inflation, economic growth and the trajectory of future policy.
AI Trade Jitters Begin To Fade
The third factor is a tentative recovery in technology and chip stocks, suggesting that recent concerns around the AI trade may be easing. Pre-market trends indicated that chip stocks were set to rise for a second consecutive session, while Nasdaq futures were up around 0.44%. The move comes after the Nasdaq Composite fell 0.78% on Tuesday.
Technology stocks have been particularly sensitive to changes in interest-rate expectations because their valuations are heavily influenced by future earnings growth. A stabilisation in the sector ahead of the Fed decision could therefore provide support to the broader market.
The recovery in chip stocks also indicates that investors are not completely abandoning the AI-led trade despite recent jitters around elevated valuations and the sustainability of AI-related spending.
Despite the firmer futures, macroeconomic risks remain significant. Crude oil prices are holding above $100 a barrel, with Brent crude futures down 0.7% at $107.92 a barrel and West Texas Intermediate futures down 1.2% at $104.55. At the same time, Treasury yields have surged on expectations of persistent inflation. The 10-year US Treasury yield was slightly above 5%, while the 30-year yield stood at 5.374%.
Higher bond yields increase the return available from relatively safer assets and can put pressure on equity valuations, particularly when inflation remains above the Fed's comfort zone.
Essential Business Intelligence, Sharp Market Insights, Practical Personal Finance Advice, Daily Fuel, Gold and Silver Prices and Latest Stories — On NDTV Profit.
