Fed did what everyone expected. Rates unchanged. Market sold off anyway. Three officials wanted a hike. Warsh sounded tough on inflation. Stocks had a rough afternoon. Then Microsoft reported and changed the mood after hours.
Dow Jones Suffers Biggest Drop Since April 2025
Dow fell more than 1,100 points Wednesday. That is 2.2% and the steepest single day percentage drop since April 2025. S&P 500 finished down 1.5% after briefly turning positive right when the Fed announcement hit. Nasdaq dropped 1.7% and officially entered correction territory having now fallen 10% from its all time high.
Correction is the technical term for a 10% decline from a recent peak. Does not automatically mean a bear market is coming. Does mean investors have done serious reassessment of valuations and risk over a meaningful period. For the Nasdaq that reassessment has been driven by AI spending scrutiny, chip stock volatility, and rising rate concerns all running simultaneously.
Fed Decision Sparks Dow Jones Selloff
Rates stayed at 3.5% to 3.75%. Expected outcome. Market had been positioned for no change.
Then the details came out. Three policymakers dissented and voted in favor of an immediate rate hike. That is a notable split. When three officials want to hike and the committee still votes to hold it signals the debate inside the Fed is more active than the unchanged decision suggests.
Warsh reaffirmed the Fed’s commitment to getting inflation back to 2%. He also said something markets found slightly reassuring. Rising Treasury yields may already be doing some of the tightening work for the Fed reducing the urgency of an immediate rate increase. That comment was read as a slight softening of the September hike certainty.
But three dissents and tough language on inflation was enough to push stocks lower. Middle East tensions escalating at the same time gave investors an additional reason to reduce risk positions heading into the close.
Microsoft Stock Surges After Strong AI Growth Forecast
Right as markets were processing a bad session Microsoft reported earnings. Beat expectations. Forecasted stronger than expected growth going forward. Disclosed more than $130 billion in new data center leases signed during the quarter.
$130 billion in new data center leases in a single quarter. That number landed immediately as a major positive signal for the chip and AI infrastructure trade. Data center leases mean servers. Servers mean chips. Chips mean orders for Nvidia, SK Hynix, Micron, and the rest of the supply chain.
Stock jumped 9% after hours. That kind of move from the world’s second most valuable company in after hours trading is large enough to shift overall market sentiment quickly. Futures turned positive overnight after the Microsoft result hit.
Meta Stock Falls as AI Spending Concerns Grow
Meta reported the same evening and went in the opposite direction. Shares fell 7.5% after hours. Revenue numbers were not the problem. Expenses were.
Mark Zuckerberg defended the company’s aggressive AI spending plans on the call. Talked about autonomous AI assistants and long term vision. Market was not in a patient mood. Investors who just watched Alphabet get sold 6.9% for similar comments last week were not willing to extend the same faith to Meta in the same earnings cycle.
Rising expenses without clear near term returns is the pattern that is getting punished this earnings season. Meta ran straight into that same wall that Alphabet hit.
What’s Next for the Dow Jones and Nasdaq?
Futures were higher Thursday morning. Microsoft’s strong results and bullish data center commentary was providing real support. After a session that saw Dow lose 1,100 points the overnight recovery was meaningful.
Markets are becoming very selective right now. Microsoft gets rewarded because it showed concrete data center commitments that support chip demand. Meta gets punished because it showed spending going up without equivalent clarity on returns. Intel beat estimates by nearly double and got rewarded. Tesla showed negative free cash flow while spending on robotaxis and got punished 14%.
AI is still the dominant market theme. Investors have not given up on the trade. They are just applying scrutiny that was largely absent six months ago. Companies that show the spending translating into real infrastructure commitments and revenue growth get bought. Companies that show spending without proportional evidence of return get sold. That filter is now running in real time through every major tech earnings report this week.
Apple reports Thursday. Amazon later in the week. Both will face the same test Microsoft passed and Meta failed.