US stock market reacts to Fed’s rate cut: analysts see overreaction, eye opportunities

By Dr. Avi Verma, IndoUS Tribune

U.S. stock markets experienced a sharp decline following the Federal Reserve’s latest policy move, with the S&P 500 and Dow Jones dropping nearly 3%, and the Nasdaq 100 falling by almost 4%. The sell-off was triggered by the Fed’s announcement of a smaller-than-expected rate-cutting path for 2025, which raised concerns among investors about future economic conditions.

On Wednesday, the Fed reduced its benchmark interest rate to a range of 4.25% to 4.5%, marking a 100 basis point cut since mid-September. Historically, rate cuts are seen as a positive for stocks, as they lower borrowing costs, stimulate economic activity, and signal that inflation is under control. However, this time the market’s reaction was not as expected.

The central bank’s updated projections for two rate cuts in 2025, down from the previously anticipated four, sent a wave of uncertainty through the markets. The news fueled a 74% surge in the VIX, the “fear gauge” of the stock market, and marked the second-largest one-day increase in its history.

Despite the negative market reaction, many analysts believe the sell-off was an overreaction and see it as a potential “buy the dip” opportunity.

Carol Schleif, Chief Market Strategist at BMO Private Wealth, commented that investors were “overreacting” to the Fed’s announcement. She noted that the economy remains strong, which is crucial for stock market performance. “The slower pace of rate cuts is for a good reason: the economy is strong, and a strong economy is ultimately what matters most for stocks and earnings,” she explained.

Andrew Hollenhorst, Chief US Economist at Citi, agreed, stating that the Fed’s hawkish tone would likely turn dovish once the labor market shows signs of weakness. “We expect a sharp dovish pivot from Powell and the committee as the labor market softens,” he said, emphasizing that the Fed’s rate-cutting pace would accelerate more quickly than markets are currently pricing.

Matt Britzman, Senior Equity Analyst at Hargreaves Lansdown, likened the market’s response to that of a “Scrooge” in December. He urged investors to view the decline as “a healthy spot of profit-taking” rather than an end to the rally. Britzman highlighted that U.S. markets had performed well since the election, making the recent drop a natural correction.

David Rosenberg, Founder of Rosenberg Research, was more critical of the Fed’s approach, describing it as “willingly reactive” rather than proactive. He pointed out that the Fed’s uncertainty and frequent shifts in its policy stance were creating confusion among investors.

Stefan Koopman, Senior Macro Strategist at Rabobank, was also critical of Jerome Powell’s performance at the press conference, describing it as his “finest hour.” He noted Powell’s admission of “higher uncertainty” about inflation’s trajectory, which reflects a central bank unsure of its future direction.

Despite the sharp declines in stock prices, Jamie Cox, Managing Partner at Harris Financial Group, believes the market overreacted. “The Fed didn’t do or say anything that deviated from what the market expected. This seems more like a ‘leave for Christmas’ sell-off,” he said. Cox predicted that this brief downturn would lay the foundation for a “Santa Rally” in the coming weeks.

Chris Zaccarelli, Chief Investment Officer at Northlight Asset Management, acknowledged the market’s disappointment but emphasized the positive aspects of the rate cut. “Santa came early and dropped a 25-basis-point rate cut in the market’s stocking but accompanied it with a note saying that there would be coal next year,” he quipped, referring to the Fed’s outlook for 2025.

Adam Turnquist, Chief Technical Strategist at LPL Financial, noted that the sell-off was likely overdue due to “overbought conditions” and a slowing market breadth. “At a minimum, market expectations have shifted toward a shallower- and slower-than-anticipated rate-cutting cycle,” he said, forecasting a headwind for stocks in the near term.

In contrast, Jean Boivin, Head of the BlackRock Investment Institute, remained optimistic about U.S. equities despite the Fed’s cautious stance. “US stocks can still benefit from AI, robust economic growth, and broad earnings growth. We see them outperforming international peers in 2025,” he said.

As analysts digest the Fed’s latest moves, it’s clear that market volatility is likely to persist. While some caution that the rate-cutting cycle could stall in 2025, others see this as an opportunity for long-term investors to buy into a still-strong U.S. economy.

While it’s too soon to predict whether the recent market plunge will extend into the new year, investors and analysts alike are preparing for a more subdued but potentially profitable 2025.