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Stocks tanked after the Fed signaled fewer rate cuts next year. Here's what Wall Street analysts see ahead.
The Federal Reserve cut its benchmark interest rate on Wednesday to a range of 4.25% to 4.5%, bringing its decline since mid-September to 100 basis points.
Wall Street usually celebrates rate cuts as lowering borrowing costs drives spending, investing, and hiring. Reducing rates also signals inflation is under control and makes risk assets like stocks relatively more attractive by trimming yields on safer assets like Treasurys.
Yet stocks tanked because Fed officials projected two cuts next year, down from four previously.
The S&P 500 and Dow Jones declined nearly 3%, while the Nasdaq 100 dipped nearly 4% after the meeting. The sharp drop fueled a 74% surge in VIX , better known as the stock market's fear gauge. It was its second-largest one-day jump in history.
But while many market pros still urge caution amid fewer rate cuts in 2025, a number of analysts across Wall Street see Wednesday's sell-off as a "buy the dip" opportunity, with the intense reaction to the Fed meeting unlikely to derail this year's "Santa Claus" rally.
Here's what investors and analysts are saying after Wednesday's brutal sell-off.
Carol Schleif, chief market strategist at BMO Private Wealth
Investors were "overreacting" because they knew going into the meeting that the Fed was likely to signal a pause in rate cuts, Schleif said.
On top of that, the economy remains strong, which is what matters the most, she added.
"Markets seemed to ignore the number of times and ways that Chair Powell noted how strong the economy is," Schleif said. "The slower pace of Fed cuts is for a good reason, which is that the economy is strong, and a strong economy is ultimately what matters most for stocks and earnings."
Andrew Hollenhorst, chief US economist at Citi
Economists at Citi said the Fed's hawkish pivot probably wouldn't last and instead turn dovish once the labor market showed signs of weakening.
With just 50 basis points of interest-rate cuts priced into the market between now and mid-2026, Hollenhorst isn't buying it.
"The continued softening of the labor market is likely to become even more evident in coming months, keeping the Fed cutting at a faster pace than markets are pricing," Hollenhorst said in a note on Wednesday. "We expect a sharp dovish pivot from Powell and the committee in the next few months."
Dan Ives, analyst at Wedbush Securities
Ives said the Fed's interest-rate path is not what will be the driving force for tech stocks over the next few years.
"Ultimately it does not move the needle for a soft landing and bullish backdrop for risk-on assets," Ives said in a note to clients.
Instead, Ives told his clients to stay laser-focused on the two biggest catalysts for tech heading into 2025: the continued development and adoption of AI and a friendlier regulatory environment that should pave the way for more mergers and acquisitions.
Matt Britzman, senior equity analyst at Hargreaves Lansdown
"US markets played the part of Scrooge on Wednesday, tumbling as the Federal Reserve's hawkish tone dampened holiday cheer.
"Investors should see this as a healthy spot of profit-taking rather than an end to the party, after what's been a fantastic run for markets since the US election."
David Rosenberg, founder and president of Rosenberg Research
"This is a Fed that really has no faith in its view at any time and is willingly reactive as opposed to proactive even though its actions affect the economy with long lags.
"You would have thought that between the commentary and forecast changes that the world has changed dramatically since the jumbo rate cut just three months ago. It clearly does not take much to cause this Fed to swing its view around. I can guarantee that it will shift again."
Stefan Koopman, senior macro strategist at Rabobank
"'We had a year-end inflation forecast, and it's kind of fallen apart.'
"Not exactly the confidence-inspiring line you'd expect from a Fed chair. But Jerome Powell's performance at yesterday's press conference wasn't his finest hour. In what might have been the most uncomfortable showing of his tenure, Powell ceded the stage to the hawks, visibly strained as he tried to sell a strategy he didn't fully appear to endorse.
"Powell flagged inflation 'moving sideways' and 'higher uncertainty' around its trajectory. These admissions reveal a central bank increasingly unsure of its footing, with rates markets now expecting just one cut for 2025 (as we do), and with no real consensus on when that final cut would arrive."
Jamie Cox, managing partner for Harris Financial Group
"Markets have a really bad of habit of overreacting to Fed policy moves. The Fed didn't do or say anything that deviated from what the market expected — this seems more like, I'm leaving for Christmas break, so I'll sell and start up next year.
"The good news is that this 10-day sell-off should lay the path for a Santa Rally leading into next week."
Chris Zaccarelli, chief investment officer for Northlight Asset Management
"Santa came early and dropped a 25-bps rate cut in the market's stocking but accompanied it with a note saying that there would be coal next year.
"The market is forward-looking and ignored the good news of today's rate cut and instead focused on the paucity of rate cuts for next year."
Jochen Stanzl, chief market analyst at CMC Markets
"What was heard last night from the Fed as an accompaniment to the interest rate cut is a showstopper for the stock market.
"The Fed is sending a clear signal that it has almost completed the phase of interest rate cuts. The year 2025 will be a significant break in the Fed's rate-cutting cycle.
"The Trump blessing could quickly turn into a curse. If the market expects yields to rise further, it is unlikely that the Fed will intervene against these forces. If inflation data continues to rise in January and February, then that could be it for the interest rate cuts."
Adam Turnquist, chief technical strategist for LPL Financial
"While the Fed is taking all the heat for today's sell-off, a reality check from overbought conditions, deteriorating market breadth, and rising rates was arguably overdue.
"Overall, today's FOMC meeting brought back some unwanted clouds of uncertainty over monetary policy next year. At a minimum, market expectations have shifted toward a shallower- and slower-than-anticipated rate-cutting cycle. Technically, the near-term risk remains to the upside for 10-year Treasury yields, creating a likely headwind for stocks."
Jean Boivin, head of the BlackRock Investment Institute
"The Fed has poured cold water on already dwindling market hopes for generous rate cuts in 2025.
"Given the risk of resurging inflation from potential trade tariffs and a slowdown in immigration that has been cooling pressure in the labor market, market expectations of only two more cuts in 2025 now seem reasonable.
"We expected this policy outcome, so it doesn't change our recently upgraded view on US equities. US stocks can still benefit from AI and other mega forces, from robust economic growth and from broad earnings growth — and we see them outperforming international peers in 2025."
Isaac Stell, investment manager at Wealth Club
"With an economy that's going gangbusters and an incoming president with a fiscally loose agenda, you wonder why the Fed felt it necessary to cut.
"Is this to curry favor with the incoming administration or is there a bump in the road the Fed can see that the rest of us are missing."
Michael Brown, senior research strategist at Pepperstone
"The FOMC delivered about as hawkish a cut as they could muster up yesterday, and market participants were not particularly pleased about what they heard.
"It was, though, a little perplexing to see such a violent market reaction to Powell's remarks, particularly considering how 'every man and his dog' had been expecting this sort of a pivot in the run up to the meeting.
"It feels, though, as if markets have overreacted to Powell's message, and that we may have reached something of a hawkish extreme here.
"Consequently, I'd be a dip buyer of equities here, as strong earnings and economic growth should see the path of least resistance continuing to lead to the upside, offsetting the fading impact of the 'Fed Put.'"
Correction: December 19, 2024
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An earlier version of this story incorrectly named an investment firm. It is BMO Private Wealth, not BMP Private Wealth.
It also misstated the name of Rabobank's analyst as Stephen Koopman. He is Stefan Koopman.
Read the original article on Business Insider