The S&P 500 dropped Wednesday, weighed down by technology shares, as investors awaited the Federal Reserve’s latest economic outlook and any signals on the future of interest rates and bond purchases.
The broad U.S. stock index slid 0.5%, while the tech-heavy Nasdaq Composite fell 1.2%. The Dow Jones Industrial Average, meanwhile, edged up 0.3%, or about 95 points.
Shares of big tech stocks helped pull major indexes lower, with Apple retreating more than 2% and
and Google parent Alphabet falling more than 1%.
Investors in recent weeks have trimmed bets on the technology stocks that soared earlier in the coronavirus pandemic while adding shares of economically-sensitive companies that should do well as the vaccine rollout progresses and more fiscal stimulus enters the financial system. Shares of Apple and
are down 7.5% and 5.2% this year, respectively, while the energy and financial sectors are leading the S&P 500.
“Tech is the funding source for reallocation,” said
managing partner for Harris Financial Group. “You’re restoring the allocations that you had pre-pandemic.”
Federal Reserve officials, who are scheduled to release their latest economic projections at 2 p.m. ET, are likely to say they expect the labor market and inflation to rebound faster than they anticipated in December. The central bank is broadly expected to reaffirm its commitment to ultralow interest rates and bond purchases for now.
Money managers have started pricing in a rise in inflation, leading to a selloff in government bonds, and are betting that interest rates will start climbing by the end of next year. They have started exiting stocks that look to be too richly valued after last year’s rally.
“Markets across the board are expensive today, and that is pinned on central bank support,” said Hugh Gimber, a strategist at J.P. Morgan Asset Management. “So this whole market is very, very sensitive to changes in central bank policy.”
A dot plot of Fed policy makers’ projections could show that some officials expect a first rate increase in 2023, Mr. Gimber said. “But the key will be communication: How will they balance this modestly brighter outlook while signaling that the Fed is still there to support markets?”
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In bond markets, the yield on the benchmark 10-year U.S. Treasury note rose to 1.685%, from 1.622% Tuesday. Yields rise as the price falls. The yield has climbed sharply from this year’s low of 0.915% on Jan. 4.
Investors will scrutinize signals from Fed Chairman Jerome Powell at his press conference, which starts at 2:30 p.m. ET.
“This is about less dovish forecasts but still dovish communication, so Powell is really walking a tightrope,” Mr. Gimber said. “Powell will be using his comments to prevent an overreaction in the bond market.”