Wall Street found its footing Wednesday morning after a choppy open, with the S&P 500 and Nasdaq hovering near flat following the release of May inflation data that matched forecasts but kept the Federal Reserve's policy path uncertain. The Dow Jones Industrial Average remained in negative territory, down 279.92 points, or 0.55%, to 50,592.19, as investors weighed the implications of rising energy prices and renewed pressure on high-growth technology stocks.
Inflation Data in Focus
The Consumer Price Index (CPI) rose 0.5% in May and 4.2% from a year ago, the fastest annual pace since April 2023, according to the Bureau of Labor Statistics. The reading matched economists' expectations, according to a Reuters survey, but marked an acceleration from April's 3.8% increase. Energy prices accounted for more than 60% of the monthly gain, putting oil markets and geopolitical developments in the Middle East at the forefront of investor concerns.
Core CPI, which excludes volatile food and energy costs, rose 0.2% in May and 2.9% year-over-year. The moderation in core inflation provided some relief, as investors looked for signs that higher fuel costs were not spilling over into other sectors. New car prices, home furnishings, and auto insurance all declined during the month, while shelter, airline fares, and medical care saw price increases.
Market Reaction and Sector Performance
The S&P 500 traded at 7,387.61, while the Nasdaq Composite edged up to 25,684.83, according to LSEG data via Reuters. Bond yields eased slightly after the CPI release, with the 2-year Treasury yield slipping to 4.11% and the 10-year note hovering near 4.52%. The dollar index fell 0.2%, providing some support for equities by lowering the discount rate on future earnings.
Energy stocks led the gainers, with six of the S&P 500's 11 main sectors trading higher. West Texas Intermediate crude oil rose 1.41% to $89.46 per barrel, according to Charles Schwab, boosting the energy sector. Meanwhile, the Cboe Volatility Index (VIX), Wall Street's fear gauge, climbed 4.88% to 20.84, reflecting ongoing market uncertainty.
AI Stocks Under Pressure
Artificial intelligence-linked stocks remained under selling pressure, with Nvidia, Broadcom, and Micron all trading lower in the morning session. The S&P 500 technology sector dropped 1.1%. Super Micro Computer (SMCI) was a standout decliner, falling sharply after announcing a $7 billion equity and equity-linked financing plan to fund purchases of AI server components.
Super Micro late Tuesday detailed plans for $5 billion in underwritten public offerings and an additional $2 billion through an at-the-market program, allowing the company to gradually sell shares into the market. Proceeds will be used to fulfill approximately $39 billion in new AI server orders from more than 20 customers. However, the prospect of dilution weighed on the stock, as existing shareholders face reduced earnings per share.
Fed Policy and Outlook
The inflation data has shifted market focus from the magnitude of the price increase to the Fed's likely response. Art Hogan, chief market strategist at B. Riley Wealth, told Reuters the data was "in-line with expectations" but noted it is "still moving in the wrong direction." Investors now expect at least one more 25-basis-point rate hike by year-end, according to Reuters.
The Federal Reserve held rates at 3.5% to 3.75% at its April meeting, citing still-high inflation and pointing to global energy prices as a contributing factor. The next Fed meeting is scheduled for June 16-17, when policymakers will also release updated economic forecasts. The trajectory of energy prices, particularly any escalation linked to Iran, could influence the Fed's tone on future rate moves.
Broader Implications
Persistently high energy prices could pressure corporate profit margins, keep Treasury yields elevated, and disproportionately affect expensive technology stocks. However, the easing of core CPI to 0.2% for the month offers a potential silver lining. If oil prices stabilize before the June Fed meeting, policymakers may not need to adopt a more hawkish stance.
The coming days will be critical in determining whether the current pullback in AI stocks is a temporary rotation or the beginning of a broader market reset. Investors will be closely watching the Fed's June 16-17 meeting for any signals on the future path of interest rates.
