Rate Hike Fears Spark Stock Market Correction Worries

The U.S. stock market has been on a tear this year, driven by massive spending in artificial intelligence infrastructure.

The broad-based S&P 500 (^GSPC) has added 12%, while the technology-heavy Nasdaq Composite (^IXIC) and blue chip Dow Jones Industrial Average (^DJI) have advanced 13% and 9% respectively, year to date.

However, Wall Street expects the Federal Reserve to raise interest rates this week, potentially marking the start of a new tightening cycle.

A CME Group tool called FedWatch shows an 87% chance of a quarter-point rate hike at the upcoming FOMC meeting on September 16. The market also predicts another quarter-point increase in December.

This expected rate hike comes as inflation has remained above the Federal Reserve's 2% target since February 2021, with sustained elevated prices putting pressure on interest rates.

Historically, new rate-hike cycles have often preceded stock market corrections. Since 1997, the first rate hike in each cycle saw an average decline of over 10% in the S&P 500, 17% in the Nasdaq Composite, and 10% in the Dow Jones.