U.S. equity markets edged lower on Tuesday as investors awaited the Federal Reserve's policy decision, with Treasury yields climbing amid expectations of a cautious stance. The S&P 500 closed 0.6% lower, while the 10-year Treasury yield rose to 4.82%, its highest level since early October.
- S&P 500 closed 0.6% lower at 5,431.24
- 10-year Treasury yield rose to 4.82% on Tuesday
- Two-year yield reached 5.21% amid tightening financial conditions
- Nasdaq Composite fell 0.7% as tech stocks underperformed
- Fed funds futures suggest 48% chance of a rate cut in early 2026
- Financials and energy sectors gained amid rising yields
U.S. stock indices ended lower on Tuesday, marking a modest retreat ahead of the Federal Reserve's December policy meeting. The S&P 500 declined 0.6% to close at 5,431.24, while the Nasdaq Composite dropped 0.7% to 17,348.15. The Dow Jones Industrial Average slipped 0.4% to 41,285.32, reflecting growing investor caution as the Fed prepares to deliver its latest interest rate decision. Market participants are closely watching for signals on the future path of monetary policy, particularly whether the central bank will maintain its current stance or hint at rate cuts in early 2026. The Treasury market showed increased pressure as the yield on the 10-year note climbed to 4.82%, up 8 basis points from Monday's close. This rise reflects a shift in market expectations regarding inflation persistence and the Fed’s balance sheet normalization plan. The two-year yield advanced to 5.21%, indicating that short-term rates remain elevated amid a tighter financial environment. A broader yield curve inversion narrowed slightly, with the 2s/10s spread at 39 basis points, suggesting some improvement in long-term growth expectations. The move in Treasury yields had a clear impact on sector performance. Technology and growth stocks, which are sensitive to interest rate changes, were among the worst performers, with the Nasdaq's underperformance driven by declines in major tech equities. Apple Inc. (AAPL) fell 1.2%, while Microsoft Corporation (MSFT) dropped 0.9%. Conversely, financials and energy sectors saw modest gains, with JPMorgan Chase & Co. (JPM) rising 0.5% and Exxon Mobil Corporation (XOM) increasing 0.8% as higher yields supported bank net interest margins and commodity strength. Investors remain cautious about rate cuts in 2026, with Fed funds futures pricing in a 48% probability of a rate reduction at the first meeting of the year. The Fed's latest dot plot projections, released in November, indicated a median forecast for two cuts in 2026, but recent inflation data has tempered expectations. The December 10–11 meeting is expected to deliver a hold on rates, with the central bank likely emphasizing data dependence and a commitment to price stability.