Market Update: Dow Drops Over 1,200 Following Red Hot August CPI Report

Stocks fell into a deep rout on Tuesday after a key August inflation report cames in hotter-than-expected, crushing market optimism that the Federal Reserve will take less aggressive actions in the near future. The Dow Jones Industrial Average sunk over 1,200 points, while the S&P 500 and Nasdaq Composite fell over 4% and 5%, respectively.

Here's how the market settled on Tuesday:

S&P 500 Index (NYSE: SPY): -4.32% or -177.72 points to 3,932.69

Dow Jones Industrial Average (NYSE: DIA): -3.94% or -1,276.37 points to 31,104.97

Nasdaq Composite Index (NASDAQ: QQQ): -5.16% or -632.84 points to 11,633.57

Tuesday's drop erased nearly all of the recent rally for stocks, with the S&P 500 fall towards its Sept. 6 close of 3,908; just five stocks in the S&P finished in positive territory at closing bell.

The Bureau of Labor Statistics released the Consumer Price Index (CPI) report for August, showing a higher-than-expected reading for inflation on both an annual and month-to-month basis. Headline inflation rose 0.1% from July to August, despite falling gas prices, and 8.3% year-over-year.

Core CPI, which strips more volatile energy and food prices, rose 6.3% annually in August and 0.3% month-to-month.

The report is one of the last the Fed will see ahead of their September 20-21 meeting. Tuesday's report cemented for most market participants that the central bank is likely to issue its third consecutive 0.75 percentage point interest rate hike in effort to stabilize prices. The unexpectedly high inflation report could also lead the Fed to continue taking more aggressive steps for longer than previously anticipated by investors.

Elsewhere, Peloton Interactive (NASDAQ: PTON) shares fell on Tuesday after the company announced late Monday that co-founders John Foley and Hisao Kushi will be stepping down from their respective positions of executive chairman of the board and chief legal officer, as CEO Barry McCarthy continues to reshape the fitness company.

Meta Platforms (NASDAQ: META) slid on Tuesday after the Wall Street Journal reported that Instagram users are spending less than one-tenth of the 197.8 million hours TikTok users spend daily on the platform. Morgan Stanley (NYSE: MS) analysts also reiterated its overweight rating on the tech stock on tuesday, citing that investors should wait for Meta's next earnings call for more information on user engagement.

Rent the Runway (NASDAQ: RENT) shares plunged over 38% after the retailer released disappointing second-quarter results that showed slowing subscriber growth. The company also cut its full-year guidance and announced plans to cut 245 of its corporate workforce.

Looking forward, much of the market's next moves will be dominated by expectations for the Fed's upcoming policy-setting meeting and reactions to those decisions.