- S&P 500 futures fell around 0.3% on Tuesday as Wall Street prepared for the start of the Federal Reserve's two-day September policy meeting.
- The 10-year Treasury yield climbed above 5.02%, its highest since 2007, as higher oil prices and Fed rate-hike expectations drove another selloff in bonds.
- Wall Street is increasingly positioned for a 25-basis-point Fed rate hike on Wednesday, raising questions over how much further stocks can withstand rising borrowing costs.
S&P 500 futures fell on Tuesday as Treasury yields surged to multi-year highs and investors prepared for the Federal Reserve’s September policy meeting, putting interest rates firmly back at the centre of the stock-market outlook. Futures tied to the S&P 500 were down around 0.3% in early trading, while Dow futures slipped 0.4% and Nasdaq 100 futures fell approximately 0.3%, pointing to another cautious start on Wall Street.
The moves follow Monday’s weaker session, when the SPDR S&P 500 ETF fell 0.45% and the Nasdaq-tracking QQQ declined 0.8%. But the bigger development Tuesday is happening in the bond market. The benchmark 10-year US Treasury yield climbed above 5.02%, reaching its highest level since 2007, as investors responded to rising oil prices and the prospect of renewed Federal Reserve tightening. That combination is creating a difficult backdrop for the S&P 500 as the Fed begins its two-day meeting.
Why Is the S&P 500 Falling Today?
The S&P 500 is under pressure today as rising Treasury yields, higher oil prices and expectations for a Fed rate hike weigh on investor sentiment. Markets have dramatically repriced the September Federal Reserve decision over the past week.
A Reuters poll published Monday found that 85% of economists expect the Fed to raise rates by 25 basis points, taking the target range to 3.75%-4.00%. Interest-rate futures are assigning an even higher probability to a hike.
That marks a significant shift from only a week ago, when economists were still predominantly expecting the Fed to remain on hold. Persistent inflation, stronger economic data and the renewed surge in energy prices have changed that calculation. For equities, the concern is no longer simply whether the Fed hikes Wednesday. It is whether one hike becomes the beginning of another tightening cycle.
10-Year Treasury Yield Above 5% Pressures Stocks
The bond market is already sending a warning signal. The 10-year Treasury yield rose above 5.02% on Tuesday, its highest level since 2007, extending a sharp increase in borrowing costs across global markets. Higher Treasury yields can pressure the S&P 500 in several ways.
They raise financing costs for businesses, increase the discount rate applied to future corporate earnings and make government bonds more competitive with equities for investor capital. The effect can be particularly significant for high-valuation technology stocks, where a large portion of the valuation depends on expected future earnings.
The S&P 500’s heavy weighting toward mega-cap technology therefore makes the latest yield move especially important.
Fed Rate Hike Could Test the S&P 500 Rally
The Federal Reserve’s September decision is due Wednesday, and expectations for a rate increase have risen sharply following recent inflation data. A quarter-point hike is now the dominant market expectation. The Reuters poll showed 85% of economists forecasting such a move, while futures markets have recently placed the probability considerably higher.
But investors may be more interested in what Fed Chair Kevin Warsh says comes next.
A single increase that is presented as a response to temporary energy-driven inflation could be easier for equity markets to absorb. Signals that policymakers expect several additional rate hikes, however, would represent a much larger shift in the outlook for stocks. Interest-rate futures are already pricing the possibility of further tightening into 2027.
That leaves Wednesday’s statement, economic projections and Warsh’s press conference potentially more important for the S&P 500 outlook than the widely anticipated quarter-point move itself.
Oil Above $100 Adds to Inflation Fears
The Fed’s problem is being complicated by another surge in energy prices. Brent crude was trading above $107 per barrel on Tuesday, as the continuing Middle East conflict and disruptions to energy infrastructure kept supply concerns elevated. Higher energy costs threaten to keep headline inflation elevated even as some underlying price pressures moderate. They can also squeeze corporate margins.
Businesses unable to pass higher transportation, manufacturing and energy costs on to consumers may face weaker profitability, creating another potential headwind for S&P 500 earnings. The oil shock therefore hits equities from two directions: through the prospect of tighter Fed policy and through pressure on company costs.
Nvidia, Broadcom and AI Stocks Face Higher-Rate Pressure
Technology shares remain one of the most important areas to watch. The S&P 500 remains heavily concentrated in mega-cap technology and AI stocks, including Nvidia, Apple, Microsoft, Amazon, Alphabet, Broadcom, Meta and Tesla. Several of those names have already struggled this month.
Nvidia was down more than 4% in September through Monday, while Broadcom had fallen nearly 7%. Amazon and Tesla were also lower for the month. Apple and Alphabet, meanwhile, had remained positive.
AI-linked stocks faced additional selling pressure Monday after leading executives in the industry called for a slower pace of artificial-intelligence development, adding another source of uncertainty for semiconductor shares. The combination of rising yields and weaker AI sentiment makes technology particularly important for Tuesday’s S&P 500 session.
Could the S&P 500 Fall 8% to 10%?
The changing rate environment has also produced more bearish forecasts on Wall Street. Macro Risk Advisors founder Dean Curnutt has warned that the S&P 500 could face an 8% to 10% correction as renewed Fed tightening raises borrowing costs and puts pressure on corporate margins.
His concern centres on what happens if Wednesday’s expected increase develops into a broader hiking cycle rather than a one-off adjustment. That forecast is not a consensus expectation, and the S&P 500 has repeatedly demonstrated resilience despite higher rates. There is also a counterargument.
Strong corporate earnings and continued AI infrastructure investment could allow equities to absorb a gradual tightening cycle better than during previous periods of aggressive Fed hikes. Some strategists have pointed out that equities have historically been capable of rising during gradual tightening cycles when earnings growth remains strong.
The key distinction is therefore likely to be the pace and scale of future Fed hikes, rather than Wednesday’s decision alone.
S&P 500 Forecast: Can the Index Hold Up as Yields Rise?
The near-term S&P 500 forecast remains cautious ahead of Wednesday’s Federal Reserve decision. The biggest immediate risk is the continued rise in Treasury yields. With the 10-year yield now above 5%, equities face a substantially higher hurdle from borrowing costs and bond-market competition. A Fed hike accompanied by signals that further tightening will be limited could ease some of that pressure.
A more hawkish message suggesting multiple additional increases, however, could push Treasury yields higher and place renewed pressure on the S&P 500, particularly technology and other high-valuation sectors. For now, Treasury yields, oil prices and Wednesday’s Fed decision remain the three biggest catalysts for the S&P 500.
S&P 500 futures are falling as Treasury yields rise, oil remains above $100 and investors prepare for a likely Federal Reserve rate hike on Wednesday.
The 10-year Treasury yield has climbed above 5.02%, its highest since 2007, as higher oil prices, persistent inflation and expectations for additional Federal Reserve tightening drive bond yields higher.
The S&P 500 outlook remains cautious ahead of Wednesday’s Fed decision. A limited rate hike accompanied by less hawkish guidance could support stocks, while signals of multiple additional hikes could increase pressure on equities.