The S&P 500 closed relatively unchanged on Tuesday as Wall Street looked ahead to this week's interest rate decision from the Federal Reserve.
The broad market index traded around the flatline, slipping just 0.09% to close at 6,840.51, while the Nasdaq Composite gained 0.13% to end the day at 23,576.49. The Dow Jones Industrial Average fell 179.03 points, or 0.38%, to finish at 47,560.29. The 30-stock index was dragged down by a decline in JPMorgan shares on higher-than-expected 2026 expense projections.
Traders are waiting for the Fed's highly awaited interest rate decision on Wednesday, which will be the last of the year. Markets are betting that the central bank will lower its key overnight lending rate by another quarter percentage point as it did at its meetings in September and October. Fed funds futures suggest a roughly 87% chance of a decrease, up from under 67% about a month ago, according to CME's FedWatch tool.
The anticipation of a cut helped send the Russell 2000 small-cap index to a fresh all-time intraday high during Tuesday's session. Rate cuts could boost small companies more because their borrowing costs are more linked to market rates than larger ones, and the lower rates could help economic growth broaden out to more industries.
"While a rate cut feels almost certain at this point, the Fed's economic projections and Chairman Powell's commentary will play a big role in how markets react — not only this week, but it could possibly set the tone for the remainder of the month," said Bret Kenwell, U.S. investment analyst at eToro. "After the recent pullback in stocks and crypto, risk-on investors are hoping the Fed will grease the rails for a year-end rally rather than pour cold water on the recent rebound."
Kenwell noted that the Fed is balancing a confluence of factors heading into its decision: sticky inflation, a cloudy macroeconomic landscape, economic data delayed by the record U.S. government shutdown and expectations of a new chairman.
"There are a lot of moving parts for the Fed in 2026. ... That brings up the key question: Will the Fed be able to strike an accommodative tone if these factors persist into 2026, or will its dual mandate keep the doves in check?" he said.
For now, LNW's chief investment officer, Ron Albahary, believes that another quarter percentage point cut and a hawkish narrative may be "baked in already." That means the market could start shifting its attention even more toward the next phase of Fed leadership — both in terms of who will govern and how they will govern — given that Powell's term as chair is up in May of 2026, he said.
"The wild swings we had in expectations in terms of a Fed rate cut for December was near 100%, then 30%, then back to 90 to 100%," Albahary told CNBC. "That kind of volatility based on Fed communication tells me the Fed communication transmission is likely broken. It probably needs to be fixed. The new leadership that's put in place, whoever it is, is probably going to focus on changing the way guidance is presented. That actually may be somewhat of a good thing."
In the broader market, CVS was among the winners of the trading day, rising almost 5% after the drugstore chain issued a better-than-expected profit outlook for next year.
