After the Fed's Hawkish Cut, Wall Street Bounces Back

Wall Street's primary indexes showed signs of recovery on Thursday, rebounding from the steep losses incurred a day earlier. Wednesday’s selloff followed the Federal Reserve’s unexpected projection of fewer interest rate cuts and higher inflation expectations for next year, which unsettled investors and weighed heavily on U.S. stocks.

‍

The Federal Reserve announced on Wednesday that it anticipates just two quarter-point rate cuts in 2025, revising its earlier September forecast that suggested four cuts. Additionally, the Fed raised inflation expectations for the first year of the incoming Trump administration. This hawkish stance triggered the most significant daily declines in the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite since August.

‍

Traders are now pricing in only one quarter-point rate reduction by mid-2025 and fewer than two cuts for the entire year, compared to the three cuts anticipated just a week ago. By mid-morning on Thursday, Wall Street was in recovery mode. At 9:44 a.m. ET, the Dow Jones Industrial Average climbed 395.85 points, or 0.94%, to 42,722.72. Meanwhile, the S&P 500 gained 52.72 points, or 0.90%, reaching 5,924.80, and the Nasdaq Composite advanced 176.89 points, or 0.91%, to 19,569.58.

‍

Market volatility subsided slightly, with the CBOE Volatility Index (VIX), often called Wall Street’s fear gauge, easing to 20.56 from a four-month high of 28.32 recorded the previous day. Small-cap stocks also performed well, with the Russell 2000 index rising 1.3%.

‍

Major technology and growth stocks led the recovery, with Tesla and Alphabet posting gains of 2% and 1.7%, respectively. Despite the bounce, market participants remained cautious. Sam Stovall, chief investment strategist at CFRA Research, warned that the rebound could be short-lived. "The market tends to 'pop after a drop,' but I wouldn't be surprised if we give back much of the gains towards the end of the day because investors don’t want to be overexposed heading into the weekend," Stovall said.

‍

On Wednesday, the benchmark S&P 500 had reached a near one-month low as investors recalibrated their portfolios to account for the Fed’s signals of higher borrowing costs in 2025. The Dow appeared on track to end its ten-session losing streak, the longest since 1974.

‍

The Federal Reserve’s hawkish stance emerged just three months after it initiated its monetary easing cycle with an aggressive 50-basis-point rate cut. That initial move had ignited risk appetite and propelled Wall Street to record highs. However, the central bank’s latest guidance dampened sentiment. Stovall noted that prolonged elevated rates could eventually support a downward trajectory for inflation, which might result in a positive year for markets. "If the Fed stays elevated for a while, that could put inflation back on a downward track and allow for a positive year," he added.

‍

Economic data released on Thursday offered some support for the recovery. Revised figures showed that the U.S. economy grew faster than previously estimated in the third quarter, and weekly jobless claims fell more than expected. These developments align with a gradual cooling in labor market conditions, which could ease inflationary pressures over time.

‍

In corporate news, the day brought mixed results. Micron Technology faced significant pressure, tumbling 17% after issuing a forecast for quarterly revenue and profit that fell short of analysts’ expectations. Conversely, Accenture surged nearly 7.2% after its first-quarter revenue exceeded Wall Street estimates. Homebuilder Lennar, however, slid 4.5% following disappointing fourth-quarter results. Meanwhile, Vertex Pharmaceuticals dropped 10.2% after reporting that its experimental non-opioid drug showed little efficacy compared to a placebo in a mid-stage pain reduction study.

‍

Breadth indicators pointed to a more favorable day for the broader market. Advancing issues outpaced decliners on the New York Stock Exchange by a ratio of 2.77 to 1, while the Nasdaq saw a ratio of 2.61 to 1 in favor of advancing stocks. The S&P 500 recorded two new 52-week highs and 18 new lows, while the Nasdaq Composite saw 11 new highs and 66 new lows.

‍

While Thursday’s rebound provided some relief, uncertainty remains high as investors continue to assess the implications of the Fed’s updated policy trajectory and the evolving macroeconomic landscape. With inflation concerns still looming and fewer rate cuts on the horizon, the path forward for markets may be bumpy as traders weigh potential risks and opportunities.

‍