Stock Market Today: Stocks Waver Near All-Time Highs Ahead of Fed Rate Cut

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Stocks wavered near all-time highs Tuesday as market participants argued over the size of the Federal Reserve rate cut expected tomorrow afternoon. Some mixed economic data also left equities searching for direction.

The Federal Reserve is going to cut interest rates at the next Fed meeting, experts say. Only the size and pace of the central bank's easing campaign remain in doubt.

The Federal Open Market Committee wraps up its regularly scheduled meeting Wednesday with a policy statement to be issued at 2 pm Eastern. While the FOMC is almost certain to lower borrowing costs from a 23-year high, the size of the reduction remained a matter of hot contention during Tuesday's session.

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As of September 17, interest rate traders assigned a 65% probability to 50 basis points (bps) of cuts, or half-a-percentage point, according to CME Group's FedWatch Tool, up from 34% a week ago. Meanwhile, the probability of a quarter-point cut fell to 35% from 66% last week.

"I expect the Fed to cut by 25 basis points, not 50," writes Kristina Hooper, chief global market strategist at Invesco. "A 50 basis point cut would raise alarm bells about the state of the U.S. economy. Recall that the Fed started a brief easing cycle with a 50 basis point cut in March 2020 with the global pandemic upon us; it would be very hard to argue that the situation is so dire now and necessitates a 50 basis point cut."

Hooper adds that even when the Fed began raising rates to fight inflation in March 2022, it didn't start with a 50 basis point hike.

By the closing bell, the blue chip Dow Jones Industrial Average was off less than a tenth of a percent at 41,606, while the broader S&P 500 was essentially unchanged at 5,634. The tech-heavy Nasdaq Composite added 0.2% to end at 17,628.

Retail sales continue to cool

Consumer spending was tepid last month but exceeded forecasts. Data from the Census Bureau showed retail sales were up 0.1% in August from the month prior, beating economists' expectations for a 0.2% decline. Slowing automobile sales pressured the headline number, though this was offset by strong online sales.

"Consumer spending slowed down this month as elevated costs, tall interest rates and reduced credit availability weighed on spending," notes José Torres, senior economist at InterActive Brokers. "The barely positive result comes after a recent trend involving shoppers alternating monthly between splurging and crimping to manage lofty charges and heavy financing costs."

Separately, homebuilder sentiment rose in August after four consecutive months of declines. The NAHB/Wells Fargo Homebuilder Sentiment Index rose to 39 from 41 the prior month, which matched Wall Street expectations. That said, Torres says the reading has "a long way to go" before hitting positive territory on a score of 50 or higher.

Microsoft returns more cash to shareholders

Microsoft (MSFT, +0.9%) helped lift the price-weighted Dow Jones on Tuesday after the tech giant said it would return more cash to shareholders. MSFT announced a new $60 billion share repurchase program and raised its dividend by more than 10%.

Microsoft disbursed nearly $22 billion in dividends over the past 12 months and still had levered free cash flow of $56.7 billion. Even better for long-time dividend-growth investors, Microsoft has hiked its payout every year for more than two decades. If it can keep its streak alive, Microsoft will soon be eligible for inclusion in the S&P 500 Dividend Aristocrats, which are some of the best dividend stocks for reliable and rising payouts.

Please note that although the share repurchase program matches Microsoft's largest-ever authorization, $60 billion represents only about 1.8% of its massive $3.22 trillion market cap.

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Dan Burrows is Kiplinger's senior investing writer, having joined the publication full time in 2016.

A long-time financial journalist, Dan is a veteran of MarketWatch, CBS MoneyWatch, SmartMoney, InvestorPlace, DailyFinance and other tier 1 national publications. He has written for The Wall Street Journal, Bloomberg and Consumer Reports and his stories have appeared in the New York Daily News, the San Jose Mercury News and Investor's Business Daily, among many other outlets. As a senior writer at AOL's DailyFinance, Dan reported market news from the floor of the New York Stock Exchange.

Once upon a time – before his days as a financial reporter and assistant financial editor at legendary fashion trade paper Women's Wear Daily – Dan worked for Spy magazine, scribbled away at Time Inc. and contributed to Maxim magazine back when lad mags were a thing. He's also written for Esquire magazine's Dubious Achievements Awards.

In his current role at Kiplinger, Dan writes about markets and macroeconomics.

Dan holds a bachelor's degree from Oberlin College and a master's degree from Columbia University.

Disclosure: Dan does not trade individual stocks or securities. He is eternally long the U.S equity market, primarily through tax-advantaged accounts.