Stock Markets Retreat As China Stimulus Hopes Fade

The Dow Jones and S&P 500 retreated on Wednesday from recent highs fueled by China's stimulus package. Investors are cautious, anticipating further economic indicators and potential interest rate cuts. Despite overall gains for the year, concerns about valuations, labor market health, and inflation loom large.

The Dow Jones Industrial Average and S&P 500 closed lower on Wednesday, stepping back from recent record highs driven by China's sweeping stimulus package. Investors are now awaiting further economic indicators and signals on upcoming interest rate cuts.

The three main indexes saw monthly gains after the Federal Reserve's rate cut on Sept. 18 bolstered hopes of a soft landing. Yet, a weak consumer sentiment report on Tuesday raised concerns about the labor market's health. "The reaction in commodities and basic materials was significant, driven by hopes that China might spur growth, positively influencing other economies," said Tom Martin, senior portfolio manager at Globalt in Atlanta.

Long-term Treasury bond yields rose over fears that looser financial conditions might reignite inflation. The likelihood of a 50 basis point rate cut by the U.S. central bank at its November meeting increased to 57.4%, up from a coin toss earlier in the week, according to the CME Group's FedWatch Tool.

In preliminary trading data, the S&P 500 dropped by 10.10 points, or 0.18%, to close at 5,722.83 points. The Nasdaq Composite, however, gained 8.22 points, or 0.05%, to end at 18,082.74. The Dow Jones eased by 284.95 points, or 0.68%, to 41,924.38, affected by a decline in Amgen shares following mixed data on two of its drugs.

The S&P 500 and tech-heavy Nasdaq have surged approximately 20% this year, driven by expectations of rate cuts and AI optimism. However, the S&P 500 is now trading at valuations above long-term averages. "Valuations and sentiment are high, but caution is growing," noted Martin. "It's hard to find bargains as the market has recovered and broadened out."

(With inputs from agencies.)