Stocks churned in midday trading Wednesday as fresh inflation data poured cold water on hopes for near-term Federal Reserve rate cuts. The Dow Jones Industrial Average shed 0.35% to 49,587.27, while the S&P 500 dipped 0.10% to 7,393.21, according to LSEG data cited by Reuters. The Nasdaq Composite eked out a 0.07% gain to 26,106.67, buoyed by a rebound in semiconductor stocks.
The producer price index (PPI) jumped 1.4% in April, the steepest monthly rise since March 2022, the Labor Department reported. Over the past 12 months, producer prices climbed 6.0%, a level not seen since December 2022. The data followed Tuesday's consumer price index (CPI) report, which showed a 0.6% monthly increase and an annual rate of 3.8%, driven largely by surging energy costs—gasoline alone soared 28.4% year-over-year.
Traders quickly adjusted their expectations. According to the CME FedWatch tool, the probability of a rate hike by December jumped to 34.3%, up sharply from 15% last week. On prediction market Polymarket, contracts assigned a 30% chance to a rate increase in 2026, while the probability of no cuts at all this year stood at 70%. Kalshi's Fed contracts showed "exactly 0 cuts" for 2026 at 63%.
“This is very challenging data,” said Peter Cardillo, chief market economist at Spartan Capital Securities, in comments to Reuters. He added that newly confirmed Fed board member Kevin Warsh—who joins as Jerome Powell's term ends Friday—is unlikely to be quick to cut rates.
Losses were broad-based, with nine of the 11 S&P 500 sectors declining. Utilities were the hardest hit. However, the Philadelphia semiconductor index bounced back 1.7% after Tuesday's chip slump. Nebius Group surged 10% after the AI cloud company posted quarterly revenue nearly eight times higher.
The chip rally highlighted the market's thinning breadth. The Philadelphia semiconductor index has soared 64% since late March, far outpacing the S&P 500's nearly 17% advance. Micron Technology and Advanced Micro Devices have each more than doubled in that period. "You have to wonder if it's gotten a little too ebullient here," said Peter Tuz, president of Chase Investment Counsel. Michael O'Rourke of JonesTrading warned that with the group carrying so much weight in the S&P 500, even a small disappointment could ripple through the market.
Earnings momentum remains strong. Morgan Stanley raised its S&P 500 target to 8,000 from 7,800, citing an "earnings story, not a multiple expansion one." As of May 8, 83.2% of the 440 S&P 500 companies that reported first-quarter results beat analyst expectations, according to LSEG data.
But risks are mounting. Paul Nolte of Murphy & Sylvest Wealth Management noted that rising producer prices could squeeze margins for firms unable to pass on costs. Brian Jacobsen, chief economist at Annex Wealth Management, said the energy shock is "more a threat to corporate margins" at this point.
Wall Street's tug-of-war continued: robust profits and AI optimism against persistent inflation and high rates. Wednesday's session failed to tip the balance, leaving both camps in a stalemate.
