By Noel Randewich
July 29 (Reuters) - Wall Street ended sharply lower on Wednesday after the Federal Reserve held interest rates steady, with AI-related chip stocks adding to recent declines ahead of quarterly reports from Microsoft and Meta Platforms.
The Fed's widely expected decision to leave the benchmark interest rate in the 3.50%-3.75% range drew dissents from three of the 12 members of the policy-setting Federal Open Market Committee who "preferred" a quarter-percentage-point hike at this meeting.
The benchmark S&P 500 hit its lowest level in a month, while the tech-heavy Nasdaq was down about 9% from its June record high.
Investors had mostly expected the Fed to keep rates unchanged. Inflation has been running above the central bank's target for more than five years, and up until last month it was accelerating as the war in the Middle East pushed up global fuel and food prices.
“The Fed held pat, as expected. The bigger question now though becomes, how much pressure will they have to hike in September? Inflation is running hot and with surging crude oil, the market expects the next hike to indeed be in September,” said Ryan Detrick, chief market strategist at Carson Group.
Microsoft and Meta Platforms are set to report quarterly results after the bell. Their shares are down in 2026 as investors question the sustainability of their AI spending boom.
Investors worry that major U.S. companies are deepening a web of AI-linked investments and continuing to funnel billions into the emerging technology at the expense of free cash flow.
Meanwhile, competition from China has been heating up, both in the race to develop advanced chips and as Chinese firms roll out cheaper AI models.
Speaking to reporters, Fed chief Kevin Warsh said spending on AI was laying the groundwork for future growth.
AI-related chipmakers added to recent losses after a sixfold jump in SK Hynix's quarterly profit fell short of lofty investor expectations. The South Korean company's shares fell 10%.
AI infrastructure company Vertiv slumped after missing quarterly revenue expectations.
According to preliminary data, the S&P 500 lost 111.36 points, or 1.50%, to end at 7,317.42 points, while the Nasdaq Composite lost 420.02 points, or 1.68%, to 24,460.08. The Dow Jones Industrial Average fell 1,129.03 points, or 2.14%, to 51,618.29.
Analysts on average expect S&P 500 aggregate second-quarter earnings to jump 40% from a year ago, with AI-related stocks accounting for much of that growth, according to LSEG I/B/E/S.
Strong earnings forecasts and Wall Street's recent decline have left the S&P 500 trading at about 20 times expected earnings, just above its 10-year average of 19, according to LSEG data.
Ford Motor gained after raising its annual profit outlook for a second time this year. Lennox tumbled after the HVAC solutions maker lowered its annual profit forecast.
Visa rose after the company beat estimates for quarterly profit, helped by World Cup-fueled travel demand.
(Reporting by Johann M Cherian and Ragini Mathur in Bengaluru, and by Noel Randewich in San Francisco; Additional Reporting by Saeed Azha and Stephen Culp; Editing by Devika Syamnath, Maju Samuel and David Gregorio)
