By Stephen Culp
NEW YORK (Reuters) - The Nasdaq Composite Index closed higher and the dollar rebounded on Wednesday as Federal Reserve Chair Jerome Powell suggested two more interest rate hikes are probably in the cards.
Of the three major U.S. stock indexes, only the Nasdaq advanced, lifted by megacap momentum stocks led by Tesla Inc (NASDAQ:TSLA), Apple Inc (NASDAQ:AAPL) and Alphabet (NASDAQ:GOOGL) Inc.
The S&P 500 ended essentially unchanged, while the blue-chip Dow Jones Industrial Average closed negative territory, weighed down by healthcare stocks.
"There's a lot of back and forth with the Fed and what they're going to end up doing," said Megan Horneman, chief investment officer at Verdence Capital Advisors in Hunt Valley, Maryland.
In the wake of the recent stocks rally, Horneman added that "equities are not believing the Fed, and you can see that through these high PE stocks that continue to rally."
"I'm concerned this rally has gotten ahead of itself and these valuations are not sustainable," she said.
Powell, participating in a policy panel with European Central Bank President Christine Lagarde, Bank of England Governor Andrew Bailey and others, suggested another two hikes to the Fed funds target rate are likely, and he did not see inflation abating to the 2% target until 2025.
"You've got to take these people at their word, and they are concerned about getting back to core inflation targets," said Peter Tuz, president of Chase Investment Counsel in Charlottesville, Virginia.
Financial markets are pricing in an 82% probability that the central bank will raise the Fed funds target rate by 25 basis points at the conclusion of its July policy meeting, according to CME's FedWatch tool.
A report that U.S. officials are considering new restrictions regarding AI chips to China dragged the semiconductor sector down 0.9%.
Nvidia Corp was the heaviest weight on the S&P 500.
"Anything that's participated in this momentum-driven rally is at risk from any headline news and deeper downturns," Horneman said. "A lot of these momentum stocks including semis are the biggest ones at risk."
The Dow Jones Industrial Average fell 74.08 points, or 0.22%, to 33,852.66, the S&P 500 lost 1.55 points, or 0.04%, at 4,376.86 and the Nasdaq Composite added 36.08 points, or 0.27%, at 13,591.75.
European stocks closed higher as strong U.S. economic data released on Tuesday allayed fears of a steep economic downturn, even as Lagarde warned the ECB is still not seeing enough evidence of an inflation cool-down.
The pan-European STOXX 600 index rose 0.70% and MSCI's gauge of stocks across the globe gained 0.12%.
Emerging market stocks lost 0.23%. MSCI's broadest index of Asia-Pacific shares outside Japan closed 0.12% lower, while Japan's Nikkei rose 2.02%.
The greenback rebounded from the previous session's softness as Powell said more rate hikes are "likely to be appropriate" this year.
The dollar index rose 0.46%, with the euro down 0.41% at $1.0914.
The Japanese yen weakened 0.24% versus the greenback at 144.43 per dollar, while sterling was last trading at $1.264, down 0.83% on the day.
Treasury yields softened as investors looked to Friday's PCE price index for further signs of slowing inflation.
Benchmark 10-year notes last rose 15/32 in price to yield 3.7097%, from 3.768% late on Tuesday.
The 30-year bond last rose 20/32 in price to yield 3.8052%, from 3.84% late on Tuesday.
Crude prices surged as a larger-than-expected drop in U.S. crude inventories offset fears of rate hikes and slowing demand.
U.S. crude rose 2.75% to settle at $69.56 per barrel, while Brent settled at $74.03, up 2.45% on the day.
Gold prices touched a 3-1/2-month low as investors bet on a higher-for-longer Fed rate policy.
Spot gold dropped 0.2% to $1,909.60 an ounce.