U.S. Stocks Rally Sharply as Rate Hike Probability Eases; S&P 500 Recovers from Month-Low

The Quick Take

• U.S. equity markets rallied sharply as the probability of a near-term Federal Reserve rate hike declined following dovish commentary
• The S&P 500 recovered further from a one-month low set on Tuesday, with major averages posting broad-based gains across sectors
• Declining Treasury yields supported the rally as bond markets repriced the terminal rate outlook lower on weaker economic signals

U.S. equity markets moved sharply higher on Thursday, extending gains from the prior session as investors reduced their probability estimates for an imminent Federal Reserve rate hike. The S&P 500 climbed further off a one-month low set on Tuesday, suggesting the prior week's pullback was driven by temporary rate hike fear rather than fundamental deterioration. The broad-based nature of the rally—with all major averages moving higher—indicates that the driving force was a macro-level risk-on shift rather than sector-specific news, consistent with a repricing of the Fed's forward path in response to incoming economic data.

The easing of rate hike expectations reflects a confluence of economic signals: weaker-than-expected jobs data from earlier in the week reduced the urgency of additional tightening, and Federal Reserve Governor Christopher Waller's dovish commentary suggested the Fed may hold rates steady at the upcoming September meeting if inflation data continues to progress toward the 2% target. Markets have oscillated between 'one more hike' and 'hold' scenarios throughout mid-2026, creating significant volatility around data release events and Fed speeches. The September 11 inflation report will now be the key data point that resolves this uncertainty.

The critical catalyst to watch is the August Consumer Price Index report scheduled for September 11, which Fed Governor Waller specifically cited as the pivotal data point for the September meeting rate decision. A below-consensus inflation print would likely solidify the hold scenario and support a continuation of the equity rally, while an upside inflation surprise would revive rate hike fears and potentially reverse Thursday's gains. Investors should also monitor the Treasury yield curve—particularly the 2-year yield, which is most sensitive to Fed expectations—as the clearest real-time indicator of how bond markets are pricing the September meeting outcome.

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