Hot CPI data revives Fed rate hike odds, pushing stocks lower

September consumer prices rose 3.7% from a year earlier, exceeding the 3.6% forecast and up from 3.4% in August. The surprise jump in inflation has pushed Treasury yields higher and placed another Federal Reserve rate hike back in play for October, sending the S&P 500 lower in premarket trading.

Core inflation also came in above forecasts. Most traders had previously expected the Fed to hold off on its next move until December, but the new data led them to raise the odds of an action this month. The Fed already lifted its upper target to 4% from 3.75% in September.

The S&P 500 is headed for a lower open, with premarket trading in funds tracking the index down 0.3%. Despite a choppy week, the S&P 500 proxy remains up 14% year to date. The 10-year yield, which closed Tuesday at 5.2%, rose this morning. Higher yields have hit small caps hardest because many of those companies carry floating-rate debt, helping explain why the Russell 2000 proxy is down 5% over the past month.

Individual stocks reacted to earnings and sector news. Bank of America fell before the open after its profit disappointed, even excluding a $1.2 billion fine. BlackRock rose after reporting record assets.

Chipmakers continued to weigh on the technology sector. Micron Technology dropped 3.6% on Tuesday following reports of technical progress at Chinese memory maker CXMT. The PHLX chip index has lost more than 8% across five sessions, with memory names continuing their slide this morning.

Market watchers project that S&P 500 profits for the third quarter will climb by more than 30%. These high expectations have drawn the index's forward price-to-earnings ratio down to under 19 times, marking its lowest level since 2023. Today's CPI report serves as a test for whether that earnings expansion can keep pace with rising interest rates. The rally has been narrow, with the median S&P 500 stock up less than 5% this year, meaning a few AI names are carrying most of the gains.

The VIX, which measures how much volatility options traders expect from the S&P 500, sits near 15. This level is within its normal range, indicating that traders are pricing in caution rather than panic.

Investors will watch the Fed’s October decision, which is now in doubt, and how bank and chip stocks trade as more earnings are released.