Rates were held, but stocks still fell
Why did the U.S. Fed’s rate hold feel like a hike?
The U.S. Federal Reserve (the Fed) held its interest rate at 3.5% to 3.75% on Wednesday, exactly as priced. The market sold off anyway, because of the way it held. Three Fed officials dissented in favour of a rate hike, and Fed Chair Kevin Warsh's press conference pushed long yields higher, not lower. A hold plus visible dissent sends the message that hikes are coming, just not yet. The bond market treated it as a committee at risk of falling behind, and long yields rose on a day the Fed did nothing.
This is Warsh's bind: hiking rates during an oil shock would punish growth because of a price he doesn’t control. However, if he waits, he’ll spend the credibility he planted a flag on in June.
How did the Dow Jones perform this week?
The week opened with relief: strikes on Iran were paused, the oil price tumbled, and stocks rallied. Then Iran fired ballistic missiles at a U.S. base in Jordan, oil jumped by 6.6% on Wednesday, and the Fed landed on top of it. The Dow closed down 1,153 points, its worst day since April 2025, with the S&P 500 Index shedding roughly $1.1 trillion in under an hour late in the session. The history is interesting here. This was the ninth four-digit Dow decline in five years, and the median script after the previous eight was a difficult following week, then a gain of about 2% in a month and 9% in three. Round numbers make headlines but don't translate into regime change automatically.
Who were this week’s AI winners and losers?
Two hours after Wednesday's close, the same market that had just panicked started discriminating. Microsoft grew revenue by 18% to $90 billion, Azure (Microsoft’s cloud computing services) accelerated to 43% and topped $100 billion in revenue for the year, and the company’s stock surged. Meta grew revenue by 28%, but its stock sank, because earnings missed their forecast, its operating margin collapsed to 31% from 43%, and the capital expenditure floor moved up again.
After Alphabet last week (when the company posted excellent results but saw its stock fall), this is making a pattern. The market no longer rewards AI ambition if it looks out of control. Growth is necessary but not sufficient. What gets rewarded is proof of a solid return potential: monetization that’s visible today, and a cost that investors can accept.
How is manufacturing data looking?
Next week brings the back half of earnings season, but also very interesting manufacturing data numbers. The trend is positive here, and we’re curious to see if it can hold up.
Listen to the latest podcast from the IG Investment Strategy Team for further insights.
