U.S. Stocks Fall Amidst Inflation Concerns

US stock markets experienced a downturn on Wednesday as investors grappled with a higher-than-expected inflation reading for January. The Dow Jones Industrial Average (^DJI) lost 0.5%, while the benchmark S&P 500 (^GSPC) declined by nearly 0.3%. The Nasdaq Composite (^IXIC), which is heavily composed of technology stocks, finished slightly above the flatline.

Inflation Exceeds Forecasts

The Consumer Price Index (CPI), released on Wednesday, showed that inflation rose at a faster pace than anticipated in January. "Core" inflation, which excludes the volatile food and energy sectors, reversed its previous month's decline, increasing by 0.4% over the previous month and 3.3% over the past year. Both rates were higher than those recorded in December.

Fed Rate Cut Expectations Adjusted

The surprise inflation figures dampened investor expectations for interest rate cuts by the Federal Reserve in 2025. As of Wednesday, traders were pricing in only one rate cut, while they had anticipated two for most of the year. The 10-year Treasury yield (^TNX) surged by 10 basis points, reaching nearly 4.64%, its highest level in over two weeks, following the inflation data.

Mixed Earnings Reports

Several companies released quarterly earnings results on Wednesday. Kraft Heinz (KHC) shares fell after the packaged food company's 2025 profit outlook fell short of expectations. Conversely, CVS Health (CVS) stock climbed as investors welcomed a smaller-than-expected drop in quarterly profits.

Tech Stocks Mixed

Intel (INTC) stock gained more than 6% on Wednesday, continuing its rally from the previous day. However, not all technology stocks performed as well. Reddit (RDDT) and Robinhood (HOOD) shares declined in after-hours trading after reporting mixed earnings results.

Bond Yields Rise

The hot inflation figures pushed the 10-year Treasury yield above 4.63%, its highest level in over two weeks. Market analyst Michael Kantrowitz pointed out that this level could lead to "bifurcated" returns, where stocks sensitive to interest rate increases may suffer while those less affected by interest rates continue to perform well.

Fed Rate Hikes Unlikely

Despite the elevated inflation concerns from the latest CPI reading, economists do not currently anticipate interest rate hikes by the Fed this year. However, they acknowledge that the data has made the possibility of hikes in the second half of 2025 less improbable.