The market expected one thing and got another. Donald Trump had called interest rates too high, while investors feared that the new Fed chair would not back down in the face of inflation. When the central bank raised interest rates for the first time in three years, stocks initially breathed a sigh of relief. It did not last long: as soon as Kevin Warsh took the podium, the rally reversed. "Inflation is too high and has lasted too long," he told reporters, adding that "today's action begins to show that we are serious about this." The Dow Jones lost about 1%, while the Nasdaq and S&P 500 gave up all of their intraday gains. All three indexes have now fallen for the seventh time in the past eight sessions.

Stock Index Performance

Donald Trump made no secret of his frustration on social media, reiterating that rates should be "1% or lower" because the United States has the best credit rating in the world. The market, however, listened not to the president but to the Fed. Treasury yields rose, while stocks fell. It was a classic reaction to a signal that inflation remains a problem.

More important for investors was the fact that Wednesday's decision shifted traders' attention to the upcoming October and December meetings. CME derivatives now price in nearly a 90% probability of another rate hike by the end of the year. Most investors are preparing for further hikes. This is never a one-off event.

Against this backdrop, Yardeni Research cut its S&P 500 target to 7,900 from 8,400, which until recently had been the highest forecast on Wall Street. The new target is now roughly in the middle of the range of estimates from more than 20 strategists surveyed by Bloomberg. At the same time, the firm lowered its forward P/E multiple from 19.8 to 18.6 amid rising bond yields.

S&P 500 Earnings Forecasts

Technically, the S&P 500 broke below the lower band of its descending trading channel on the daily chart, allowing traders to add to short positions opened at 7,675. The first of the two previously established targets, at 7,520 and 7,460, has been reached. It makes sense to move the second target down to 7,350.