The Dow, S&P 500, and Nasdaq Split Ahead of a Near-Certain Rate Hike

Both of the things that started this week on a sour note eased off on Wednesday. Oil fell and bond yields backed away from 5%; The market responded by going in three different directions at once.

The Nasdaq Composite (NASDAQINDEX: ^IXIC) was up 0.7% as of 12:41 p.m. ET, the S&P 500 (SNPINDEX: ^GSPC) added 0.3%, and the Dow Jones Industrial Average (DJINDICES: ^DJI) went nowhere at all, down less than 0.1%. Eighteen of the Dow's 30 stocks were higher, which makes the flat reading a little strange.

^IXIC data by YCharts

Oil finally reversed, and energy stocks paid for it

The two pressures that drove this week's selling both eased. U.S. crude fell more than 3% after a report showed energy inventories rose last week, and the-settled below 5% ahead of the Fed announcement. Continued violence in the Strait of Hormuz mattered less than strong oil inventories this morning.

Cheaper oil hit energy producers hard. The United States Oil Fund (NYSEMKT: USO) fell 3%. Chevron (NYSE: CVX) and ExxonMobil (NYSE: XOM) both dropped more than 2%.

AI infrastructure names bounced after several losing sessions. Nvidia (NASDAQ: NVDA) rose 1.8%, and Advanced Micro Devices (NASDAQ: AMD) gained 3.8%. Space Exploration Technologies (NASDAQ: SPCX) climbed 5.7% despite its xAI division's software focus. SpaceX was the largest positive contributor to the Nasdaq Composite, helped by news that its next Starship test flight is set for Sept. 22 and will deploy Starlink V3 satellites.

So why is the Dow flat? You can blame two stocks. International Business Machines (NYSE: IBM) fell 3.3% and American Express (NYSE: AXP) dropped 2.5%, and between them, they erased 95 Dow points. IBM actually announced a $1 billion government contract and fell anyway, which says more about the macro mood than about Big Blue.

Forget the hike. Watch the dot plot.

The Federal Open Market Committee announces its decision around 2 p.m. ET today. Futures and prediction markets hold better than 90% odds of a quarter-point increase, which would work out to a 3.75% to 4% target range. It would be the first rate hike since July 2023, following six cuts totaling 1.75 percentage points.

The projections matter more than the vote. The committee updates its Summary of Economic Projections and dot plot, which for the first time will include 2029 estimates. The dot plot collects each policymaker's private rate forecast into one anonymous chart, which is the closest thing investors get to knowing what the Fed plans next. Morgan Stanley went from forecasting zero hikes this year to two, with the second expected in December.

History offers a mixed guide to what follows next. DataTrek Research found the Nasdaq declined in the month after five of the past six hiking cycles began, and was worse after three months in four of them. However, the hikes often led to long-term benefits, as half of the hikes inspired positive Nasdaq returns six months later.

Everyone knows what happens at 2 p.m. Nobody knows what happens in December. Stay tuned for more market drama.

American Express is an advertising partner of Motley Fool Money. Anders Bylund has positions in American Express, International Business Machines, and Nvidia. The Motley Fool has positions in and recommends Advanced Micro Devices, American Express, Chevron, International Business Machines, and Nvidia. The Motley Fool has a disclosure policy.