S&P 500 dips following two days of gains as investors assess the Fed's next move, recession odds

The S&P 500 dipped on Tuesday as traders assessed the Federal Reserve's next move and whether the U.S. is headed eventually into a recession.

The S&P 500 lost 0.5% after posting two-straight days of gains. The Nasdaq Composite shed 1.3%, pulling back after a 1.9% pop in the prior session. The Dow Jones Industrial Average traded about flat, boosted by gains in Merck and Chevron.

Stocks hit their lows of the session and rates hit their highs after Federal Reserve Governor Lael Brainard said Tuesday that the central bank needs to shrink its balance sheet "rapidly" to drive down inflation.

"Inflation is much too high and is subject to upside risks," she said, noting the Fed needed a steady pace of rate hikes as well.

Deutsche Bank on Tuesday became the first major Wall Street bank to forecast a U.S. recession is ahead, citing the Fed getting more aggressive to fight inflation.

"The US economy is expected to take a major hit from the extra Fed tightening by late next year and early 2024," the bank's economists said in a note to clients Tuesday. "We see two negative quarters of growth and a more than 1.5% pt rise in the US unemployment rate, developments that clearly qualify as a recession, albeit a moderate one."

Tuesday's moves come as investors await the release of Federal Reserve meeting minutes on Wednesday. Those minutes were for the meeting last month where the central bank hiked rates for the first time in years and indicated six more hikes were ahead this year.

The key part of the yield curve — the 2-year and 10-year spread — reversed course on Tuesday after first inverting last week. Inversions of the yield curve have historically preceded recessions.

Shares that would hold up well in a slowing economy were higher on Tuesday. Drugmakers Johnson & Johnson and Pfizer were higher by more than 1.5%. Staples like Procter & Gamble and Walmart were also higher. Meanwhile, cruise stocks like Carnival, Norwegian Cruise Line, and Royal Caribbean rose more than 3%.

Tech shares were lower, led by chip shares, consolidating their big gains from Monday. Some believe this group could be hurt the most by the Fed's hiking campaign as investors take less risk and buy stocks with steady profits, rather than growth shares promising big earnings down the road.

Nvidia lost 3% while Amazon and Tesla were each lower. Still, Twitter shares added another 3% to their 27% Monday gain after Elon Musk said he will join the company's board of directors a day after revealing a 9.2% stake in the social media giant.

And investors continue to keep an eye on Europe, as the war between Ukraine and Russia continues. Ukraine President Volodymyr Zelenskyy pledged to pursue allegations of war crimes against Russian forces, noting that more than 300 people were killed and tortured in a suburb near the capital of Kyiv. (Click here for the latest.)

"Markets have been resilient given the war in Ukraine, continued price pressures, and uncertain global economic outlook, with investors' 'buy the dip' mentality driving equity returns," said Mark Hackett, Nationwide's chief of investment research.

Oil prices continued their climb on Tuesday, with West Texas Intermediate rising 0.7% at $104.03 per barrel and Brent crude gaining 0.5% to $108.09. The market has been volatile since the onset of the war amid concerns over supply disruptions.

The Nasdaq Composite rose 1.9% on Monday, led by shares of Twitter. The blue-chip Dow rose about 100 points to begin the trading week, while the S&P 500 advanced 0.8%, both posting their second straight day of gains.

The new quarter has kicked off after the major averages finished their worst quarter in two years. Investors are preparing for the first-quarter corporate earnings season, which is set to begin next week.