Written by: Tide Research

On Wednesday, half of the officials in the Fed's dot plot expect at least one interest rate hike this year. Wash announced at the press conference the abandonment of forward guidance, leading all four major indices to drop more than 1%. Gold wiped out all gains made this week, and the dollar surged to a two-month high. The optimism from Monday did not last three days, as the hawkish dot plot and a new chair who refused to take a position cleared it out completely.

Market Performance

The S&P 500 closed down 1.21% at 7,420.10 points, the Nasdaq fell 1.34% to 26,021.66 points, the Dow dropped 0.97% to 51,492.55 points, and the Russell 2000 decreased 0.74%. All four indices closed lower simultaneously, marking the biggest trading day loss in three days this week. For most of the day, the market remained restrained; when the FOMC statement was published, indices only slightly dipped. The real selling pressure concentrated in the thirty minutes after Wash's press conference began, with the S&P 500 falling nearly 0.8% without any rebound afterward, and all four indices closed near their daily lows.

SpaceX fell about 5% to $191, marking its first drop since being listed. After three consecutive days of new highs, the valuation pressure brought by the hawkish dot plot finally hit this nearly $2.7 trillion market cap stock, and implied volatility for options subsequently rose, officially marking the end of its post-IPO honeymoon period.

Meta dropped over 5% to $586.20, leading the technology giants lower, with Alphabet, Amazon, and Microsoft also falling in sync. The entire Magnificent 7 is uniformly under pressure under the new interest rate framework, and the pricing logic for high-valuation technology is being forcibly reset by hawkish expectations, with the tech sector contributing the majority of the Nasdaq's decline that day.

The Philadelphia Semiconductor Index rose 1.38%, being the only bright spot of the day. Applied Materials gained 9.3% to $214.60, Lam Research rose 6.6% to $97.40, and Arm Holdings increased 6.2% to $182.30. The logic behind these gains was consistent: the long-term demand for AI computing power remains intact under the interest rate shock, with funds flowing out of interest rate-sensitive software and internet sectors and finding support in equipment and infrastructure layers.

Defensive sectors such as consumer staples and utilities led the decline, as both sectors' valuations have long relied on low-interest-rate support, making them the first to be impacted by the repricing of interest rate hike expectations. Funds shifted from defensive investments to performance-supported computing chains, which was the clearest rotation direction of the day.

Macro and Outlook

The dot plot was the core focus of the day. Among 18 officials, 9 expected at least one interest rate hike this year, with 5 expecting two hikes, 1 expecting three, and only 1 expecting a rate cut. The central forecast for interest rates by the end of 2026 was substantially raised from 3.4% in March to 3.8%, officially marking the end of the rate cut cycle. The length of the statement was reduced by two-thirds, deleting all rate guidance and leaving only a sentence at the end stating "committed to achieving price stability," which was the first resolution to pass unanimously in nine months.

Wash stated at the press conference, "I can't tell you what the next step will be," announcing the abandonment of forward guidance while seemingly not submitting the dot plot, leading outsiders to speculate that this may be the last dot plot. Trump remarked in the G7 that Wash is excellent, and while the likelihood of rate hikes is hard to believe, he will consider Wash's wishes. The tension between the White House and the Fed has not dissipated; it has just been temporarily overshadowed by the hawkish impact of the dot plot.

In May, retail sales rose 0.9% month-on-month, reaching a more than three-year high. Last week, EIA crude oil inventories decreased by 8.26 million barrels, far exceeding expectations, with storage at Cushing dropping to a decade low. The combination of these data points makes it even harder to loosen the expectations for high inflation, and any easing statements find it challenging to gain a foothold.

The VIX jumped 12% to above 18, 2-year Treasury yields surged by 13 basis points to 4.18%, and the 10-year yield rose about 7 basis points to 4.49%. Traders have fully priced in a rate hike before October, with September seen as likely, and two rate hikes expected by the first quarter of next year.

The dollar soared 0.86% to a two-month high, gold fell 1.64% to $4,258 per ounce, and silver dropped nearly 3%. Bitcoin (CoinGecko) fell to the $64,100 range, while Ethereum weakened to around $1,760. Oil stabilized post-shock around $76.

The U.S.-Iran understanding memorandum has been remotely signed, and a formal ink will be made in Switzerland on the 19th, but Trump clearly stated that military action would be restarted if Iran does not comply. The resumption of operations in the Strait of Hormuz still holds uncertainties. The market will be closed for the Friday and the 619 Festival, and all the impacts brought by Wash will be processed on Thursday.

Tide Perspective

Wash's abandonment of forward guidance has a direct consequence on the market: Wall Street has lost a reliable anchor. Over the past decade, the Fed provided roadmaps, wording, and dot plots, allowing investors to price along these clues. After Wash dismantled this entire setup, the uncertainty premium has permanently elevated to a new level.

The strength of semiconductor stocks against the trend indicates that the long-term logic of AI computing power has not been overturned, but the decline of Meta and the first drop of SpaceX suggest that the valuation reassessment for high-valuation technology sensitive to interest rates is just beginning under the new framework where "the possibility of interest rate hikes outweighs that of cuts."

There is hope for bulls in two places: if the U.S.-Iran agreement is successfully finalized on the 19th, a retreat in energy premiums may bring a breather; the semiconductor index's reverse rise that day already hinted that as long as the story of AI capital expenditure continues, there is support in the equipment chain.

However, if the market chooses to continue digesting hawkish shocks when it opens on Thursday instead of waiting for geopolitical dividends, this downward trend is not yet over. Wash's debut has ended, the next question is: will he speak next before or after the interest rate hike.