S&P 500; US Indexes Fundamental Daily Forecast – Hawkish Fed Drives Bank Stocks Higher

The major U.S. stock indexes closed mixed on Wednesday after the U.S. Federal Reserve indicated another rate hike was still possible before the end of the year and that it would begin the reducing of its balance sheet next month.

In the cash market, the benchmark S&P 500 Index settled at 2508.24, up 1.59 or +0.06%. The blue chip Dow Jones Industrial Average settled at 22412.59, up 41.79 or +0.19% and the tech-based NASDAQ Composite ended the session at 6455.81, down 5.51 or -0.09%.

The Fed’s monetary policy statement came in a little more hawkish than traders anticipated, triggering a surge in the benchmark 10-year U.S. Treasury yield. The spike in yields drove up bank shares and other financial market-related shares.

The S&P 500 Index closed at a record high, led primarily by bank shares, followed by industrial and materials shares.

The Dow Jones Industrial Average also finished at a record close. It was supported by a rise in banking stocks JPMorgan and Goldman Sachs.

Shares of other major banks including PNC Financial Services, Bank of America and Citi also rose close to 1 percent.

Bank shares tend to rally during periods of rising interest rates because higher rates mean more profits.

The NASDAQ Composite finished lower because of its lack of exposure to the banking sector. Weak performances by Apple and Microsoft also dragged the index lower.

On Wednesday, the Fed left its benchmark interest rate unchanged at<1.25 percent, however, its updated interest rate forecast surprised traders by indicating that another rate hike was likely before the end of the year. The Fed also said it will begin trimming its $4.5 trillion balance sheet.

At the end of the session, the CME Group’s FedWatch tool showed that investors now see a 70 percent chance of a rate increase by the end of December.

Banks stocks could continue to support the S&P 500 Index and the Dow over the near-term but some investors are saying gains could be limited if the economic data doesn’t support an improving economy. Additionally, investors and the Fed would still like to see the economy get a boost from changes in fiscal policy especially from tax reform.