Take a Hike. The Federal Reserve raised interest rates for the first time in three years on Wednesday. Unsurprisingly the market ended lower as yields on 10-year Treasuries topped 5% again.

The Dow Jones Industrial Average lost 1.2%, the S&P 500 fell 0.5% and the Nasdaq Composite edged 0.01 lower%.

"Today's rate increase was an easy decision for the Fed, with U.S. inflation above the 2% target for over five years...but with ongoing geopolitical and energy price uncertainty emanating from the Persian Gulf, the 2027 policy outlook is murkier," notes Ronald Temple, chief market strategist of Lazard Asset Management.

The quarter-point increase, which brings rates from 3.75% to 4%, was widely expected, helping to explain why the market-which is rarely keen to cheer a rate hike-at least didn't completely lose its mind. With a relatively robust job market and strong retail sales out this morning, the central bank appears to have felt comfortable focusing on inflation, which has continued to creep higher as the war in Iran pushes up fuel costs.

Recently minted Fed Chair Kevin Warsh said again that he isn't "in the forward guidance business," but today's move probably won't be the last time the Fed raises rates. The decision was unanimous, and the majority of the Federal Open Market Committee's members expect at least one more increase to come this year.

"The history is clear that once the Fed begins raising rates, they do it multiple times, but the pattern is less clear about whether they will raise rates at consecutive meetings or leave rates unchanged at some of the meetings in between this meeting and future ones where they do raise rates (as we believe to be most likely)," writes Chris Zaccarelli, chief investment officer for Northlight Asset Management.

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The Hot Stock: Lumentum Holdings +9.6% The Biggest Loser: J.B. Hunt Transport Services -13.3%

Best Sector: Information Technology +0.10% Worst Sector: Energy -2.97%

Now What?

The Fed decision is out of the way, and we've already gotten the market's initial reaction. Investors might rightfully be asking: What's next?

Higher interest rates aren't typically rally fodder, and not just because higher Treasury yields can lure investors away from riskier stocks. They raise the cost of capital for companies, home buyers, and consumers. They're a problem for growth companies in particular, especially tech, whose anticipated future earnings are less appealing to investors when rates go up: If you can get a greater return now, why wait?

Given that the current bull market has been driven by buzzy artificial intelligence companies that are spending billions in hopes of reaping even greater profits down the road, the latter point would seem especially thorny for the equity optimists.

However, higher rates don't have to spell disaster for stocks.

Although they're likely to see near-term pressure, using history as a guide shows "that over a longer time horizon (six to 12 months after the first rate hike), stocks typically recover and push into positive territory," writes Wolfe Research's Chris Senyek. "[O]ur sense is that the Technology sector can continue to work, given tailwinds from AI megatrends, very strong earnings results, and a resilient U.S. economy."

Citi's David Groman likewise expects stocks to "wobble around the start of hikes," before recovering in six to 12 months. But beyond that, the picture gets hazy: "On the long end, we find that underlying macro conditions remain key; equities can better digest higher bond yields when growth stays resilient, while falling inflation also helps," he writes. "All this would suggest more short-term caution amid stagflationary risks from geopolitics."

He's still upbeat on stocks through mid-2027, given ongoing earnings growth, though. It takes more than one a handful of rate hikes to defeat this bull.

The Calendar

The Census Bureau reports residential housing statistics for August tomorrow. Economists forecast a seasonally adjusted annual rate of 1.32 million privately-owned housing starts, nearly 100,000 more than in July.

The National Association of Realtors reports its Pending Home Sales Index for August. Consensus estimate is for a 0.5% month-over-over increase following a 2.3% decline in July. Pending home sales in July fell to its lowest level since January. "The highest mortgage rates of the year hit right in the middle of summer, and that's pulling back contract signings," according to NAR chief economist Dr. Lawrence Yun.

-Dan Lam

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