Wall Street slips after rally, markets eye cautious Fed

US stocks slipped on Friday, with the S&P 500 and Nasdaq indexes taking a breather after consecutive sessions of record highs, as investors weighed hawkish Federal Reserve projections against the backdrop of a cooling economy.

Limiting losses on the tech-heavy Nasdaq, Adobe jumped 14.9%, on track to mark its biggest one-day jump in four years after the company raised its annual revenue forecast on more demand for its artificial intelligence-powered software.

Markets have persisted with expectations of a September start to policy easing – seeing an over 70% chance of a cut at that meeting, as per the CME’s FedWatch tool – while traders are pricing in two cuts by year-end.

However, that clashed with the central bank’s own forecasts released on Wednesday, where policymakers dialed back their projections for three cuts this year to just one.

“Investors think the Fed’s data was already somewhat out of date,” said Ross Mayfield, investment strategy analyst at Baird, referring to softer consumer price inflation data earlier in the week.

Cleveland Fed President Loretta Mester said the trend lower is good news for the economy and the central bank.

Hopes of easing Fed policy, combined with megacaps’ strength, have seen major indexes rally, with the S&P 500 and the Nasdaq on pace for their seventh week of gains out of eight.

Wall St slips ahead of inflation report

However, this has raised some concerns about the sustainability of equity strength, especially if economic recession risks grow, with the blue-chip Dow on track to end the week lower.

“The market is also just pricing in a probability, even if it’s a small one, of a second half recession where the Fed has to cut rates a lot,” Mayfield said.

Adding to the gloom, a preliminary University of Michigan survey showed a Consumer Sentiment Index slipped to 65.6 in June, sharply lower than expectations of 72.

At 10:06 a.m. ET, the Dow Jones Industrial Average was down 298.48 points, or 0.77%, at 38,348.62, the S&P 500 was down 22.72 points, or 0.42%, at 5,411.02, and the Nasdaq Composite was down 17.10 points, or 0.10%, at 17,650.46.