Fed Preps ‘Most Unpredictable’ Meeting in Year: 8 Key Items Shaping the Stock Market Wednesday

These are the early headlines and other items poised to influence the market at the start of the trading day. As we share this collection of market drivers, U.S. equity futures point to a mixed market open later on Wednesday morning.

1. Oil rallied as a fresh round of fighting erupted across the Middle East, a reminder of the continued risk to flows in the region and of the fragility in the wider geopolitical environment. Brent climbed above $87 a barrel, paring some of the 16% slump over the past three sessions, the biggest such decline since 2020. (Bloomberg)

The United States and Saudi Arabia jointly struck Iran-backed armed groups in Iraq on Wednesday, the first U.S. airstrikes in the Middle East since President Donald Trump suspended the U.S. bombing campaign against Iran ‌last week. Iran, for its part, rejected an Omani proposal to jointly manage the Strait of Hormuz and said it had fired on ships in the strait and at U.S. bases in Jordan. (Reuters)

Another round of uncertainty has been injected back into the market and that is throwing cold water on the idea of a swift de-escalation and re-opening hopes for the Strait of Hormuz. With the risk levels for ships navigating the Strait of Hormuz and the Bab al-Mandab strait in the Red Sea, the potential for incremental supply chain challenges is rising. Ultimately, the question remains one of duration with its length determining the degree of disruption and inflation tailwinds. We’ll keep politics out of this, and keep our focus on those areas, and implications for the market and the Portfolio.

2. SK Hynix said it expects its capital investments to rise around 50% to at least 45 trillion won ($31 billion). It posted margins of more than 80% for the June quarter — a high watermark — because of the endemic memory shortages that have helped raise prices it charges customers like Apple Inc. and Nintendo Co. Yet the Korean company’s shares fell 19% in Seoul Wednesday, reflecting both the sky-high expectations that surround the AI industry’s linchpins and the growing concerns that big tech firms such as Meta Platforms Inc. are building more data centers than they need. (Bloomberg)

…SK Hynix executives said the risk of memory oversupply from capacity expansion remained “limited”, arguing that supply would stay tight for a “considerable” period as customers continued to buy more chips. They also expected cloud service providers to keep increasing AI spending beyond 2027 and said their long-term supply agreements, which run for about five years, were designed to reduce exposure to memory-price volatility. (FT)

Normally, that capital spending figure from SK Hynix (SKHY) alongside recent ones from Samsung (SSNLF), Intel (INTC), Micron (MU) and others, would be driving shares of semi-cap companies, like Applied Materials (AMAT), higher. Despite expected capacity shortages for memory that will persist for some time, the question of overcapacity is in the air. We’ve discussed how our litmus test for that is AI adoption and usage levels, and by all accounts, both are rising with consumers, enterprise customers and other institutions.

With that in mind, on Tuesday, we shared levels we are watching closely when it comes to the shares of Applied Materials and Marvell (MRVL), both of which have been simply pummeled over the last several weeks despite indications of strong demand. As we discussed in that alert, alongside watching support levels for those shares, we are also keeping a close watch on key support levels for the Nasdaq Composite. Between Wednesday’s Fed policy meeting and quarterly results after Wednesday’s market close from Meta (META) and Microsoft (MSFT), and Thursday night from Amazon (AMZN) and Apple (AAPL), we’ll be looking to see it that index can hold support. If not, an oversold condition would likely draw out bargain hunters like us.

3. The Federal Open Market Committee is expected to keep rates unchanged when it releases its interest-rate decision on Wednesday at 2 p.m. Eastern. Fed chairman Kevin Warsh will later speak to the media in a press conference slated to start at 2:30 p.m. This will likely be one of the Fed’s most unpredictable meetings in years, with futures markets still pricing in decent odds of a rate hike. The uncertainty is driven in large part by the fact that Warsh has abandoned the practice of forward guidance, providing markets with less to go on to forecast the Fed’s next move. (Barron’s)

The probabilities for what the Fed will deliver on Wednesday have shifted some over the last few days, which we can trace back to similar movements in oil prices. Even after the rebound captured by the CME FedWatch Tool, at just under 36%, the market’s expectation for a rate hike on Wednesday afternoon is well below the 64%-plus expectation that the Fed maintains the current federal funds rate.

Granted, oil prices have rebounded, some would say considerably from their early July lows, but they are still well below levels reached in April and May. How the Fed views the potential duration of the U.S. and Iran war is an unknown, and renewed attacks in the last 24 hours run the risk of extending that expectation and corresponding inflation pressures. Given those unknown unknowns, the Fed is likely to err on the side of caution, especially given the lag effect tied to monetary policy.

We do expect a more hawkish leaning from Fed Chair Kevin Warsh during Wednesday’s presser. And while the new chair is reticent to give forward guidance, given his pledge to get inflation back to the Fed’s 2% target, if pressed about the war and inflation, he could intimate something along the lines that, if current inflation tailwinds persist, the Fed may need to act. We’ll have more to say on this once we see the policy statement at 2 p.m. and digest Warsh’s corresponding presser on Wednesday afternoon.

4. Meta Platforms will report second-quarter results after markets close Wednesday, and recent history tells us Wall Street will only care about one number: Its capital expenditures. Meta will likely deliver a record quarter for its core advertising business. But what CEO Mark Zuckerberg has to say about the company’s massive and, at times, confusing artificial-intelligence buildout will dictate where shares go next. (Barron’s)

That is only half right in our view. Yes, what Meta says about its capital spending plans will be very important for the market. However, we’ve talked before about the importance of Meta growing its average revenue per user as growth in that user base slows. We’ve also seen the company drive pricing and margins higher due to cost reductions but also the implementation of AI in its business.

What we see on those fronts should help shape the market’s reception to Meta’s capital spending comments. And with 37.8 million shares short per the latest data from Nasdaq, a positive surprise relative to market expectations could pop the stock.

5. …Microsoft shares are up 5.5%. To keep that momentum going, Microsoft has three burning AI questions to answer with earnings and guidance. First, this being the fourth-quarter, it will round out Microsoft’s fiscal year 2026 capital expenditures, expected at around $145 billion, up from $88 billion the year before. Will Microsoft give capex guidance for 2027? But the real question is: Will it be another astronomical number, like Alphabet’s upsized $200 billion 2026 capex outlook from last week? Can Azure keep it up? Analysts are expecting revenue to rise by 40% again, crossing the $30 billion mark. The final question regards Microsoft’s business software segment, which is caught up in the bearish narrative surrounding that business from AI disruption. (Barron’s)

These are the questions that we and many others in the market will be seeking answers to when Microsoft reports after Wednesday’s market close. We’ll also be looking to see what the company says about its remaining performance obligation backlog that hit $627 billion exiting the March quarter and sizing up the margin performance for its cloud business against that quarter as well. We’ll be looking to see if monetization efforts are improving as it brings additional capacity on stream to convert that backlog into booked revenue.

We do expect Microsoft to give color on its fiscal 2027 capital spending plans, and how stacks up against that backlog and margin prospects will be one of our focal points. With 92.7 million shares short and an estimated 2.8 days to cover heading into Wednesday night’s earnings report, a less than feared report from the company could trigger some short covering.

6. …market restrictions coming into effect on the Kospi on Friday. South Korean regulators have set a minimum cash requirement to invest in single-stock leveraged exchange traded funds, which they have blamed for much of the volatility. (FT)

We’ve talked about the increased market volatility brought on by the combination of margin borrowing and single-stock ETFs. That is what South Korea aims to address with the Kospi, and single-stock products tied to Samsung and SK Hynix. Under the new requirement, Korean investors must hold a deposit or maintain an account balance of at least 30 million won in cash, equivalent to $20,330, when making new or additional investments in single-stock leveraged ETFs or exchange-traded notes. This measure, which is part of a broader policy initiative, aims to curb market swings by raising the cost of leverage and increasing barriers to short-term speculation.

It’s TBD how impactful it is, but it sounds like a step in the right direction.

7. Economic data on Wednesday per TipRanks: MBA Mortgage Applications Index (Weekly), EIA Crude Oil Inventories – (Weekly), Fed Interest Rate Decision (2 p.m. ET)

8. Companies reporting today per TipRanks: Open: AstraZeneca (AZN), Eagle Materials (EXP), Flex (FLEX), General Dynamics (GD), Johnson Controls (JCI), M/I Homes (MHO), Procter & Gamble (PG), SK Hynix (SKHY), VF Corp. (VFC), Vulcan Materials (VMC). Close: American Water Works (AWK), ARM (ARM), Chipotle (CMG), Equinix (EQIX), Fortinet (FTNT), Lam Research (LRCX), Meta (META), Microsoft (MSFT), Qualcomm (QCOM), Robinhood (HOOD)

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At the time of publication, TheStreet Pro Portfolio was long AAPL, AMAT, AMZN, META, MRVL, MSFT and MU.