Dow, S&P 500, Nasdaq clobbered as Fed, Powell signal fewer rate cuts in 2025

Stocks closed in a sea of red on Wall Street after the central bank cut interest rates by 25 basis points and projected fewer interest rate cuts for 2025 amid sticky inflation.

Megacap Big Tech had an especially rough session. Tesla (TSLA) was one of the worst performers in the S&P 500 after shares closed down over 8%.

Amazon (AMZN), Apple (AAPL), and Microsoft (MSFT) fell over 4%, 2%, and 3%, respectively.

Facebook owner Meta (META) and Google parent Alphabet (GOOG, GOOGL) also saw shares drop over 3%, while AI chipmaker Nvidia (NVDA) shed a little over 1%.

The Dow Jones Industrial Average (^DJI) fell more than 2.3% on Wednesday amid a broader market sell-off as markets adjusted to the Federal Reserve projecting fewer interest rate cuts over the next year.

The Dow has now fallen for 10 straight days, its worst run of consecutive down days since 1974.

Read more on why the Dow has been lagging here.

On big down days in markets, I always love seeing what stocks are up.

It often says a lot.

The one stock that is up today amidst the sell-off that caught my attention? Nvidia (NVDA)! The stock has been hammered from the November highs on demand and China worries.

But I have to say, BofA analyst Vivek Arya made a compelling case to me on our Opening Bid podcast (video below) today on why to stay long on Nvidia here.

Worth a watch.

The 10-year Treasury yield (^TNX) has added about 10 basis points on Wednesday, pressing near 4.5% as Federal Reserve Chair Jerome Powell detailed why the Fed plans to be more “cautious” with interest rate cuts next year.

As Powell spoke, interest rate sensitive areas of the market, like small caps, sold off. The Russell 2000 Index (^RUT) fell nearly 2.3%. Meanwhile, Real Estate (XLRE), which is also seen as a sector that could benefit from further rate cuts, fell about 2.7%.

The last mile of the Fed’s push to bring inflation down to its 2% target is proving more difficult than central bank leaders initially projected.

“We’ve had a year-end projection for inflation, and it’s kind of fallen apart as we approach the end of the year,” Fed Chair Jerome Powell said. “I can tell you that might be the single biggest factor — inflation has once again underperformed relative to expectations.”

So far this year, inflation has moderated but remains stubbornly above the Federal Reserve’s 2% target on an annual basis, pressured by hotter-than-expected readings on monthly “core” prices in recent months.

According to updated economic forecasts from the Fed’s Summary of Economic Projections (SEP), the central bank sees core inflation peaking at 2.5% next year, higher than September’s projection of 2.2%, before cooling to 2.2% in 2026 and 2.0% in 2027.

“[Inflation] is still going to be between 2.5% and 3%,” Powell said. “It’s way below where it was, but we really want to see progress on inflation.”

The election of Donald Trump as the nation’s next president has further complicated the outlook, with some economists arguing the US could face another inflation resurgence if Trump follows through with his key campaign promises.

Federal Reserve Chair Jerome Powell was asked about how Fed officials are considering the incoming Trump administrations policies.

Powell said some officials did identify “policy uncertainty” as a reason for inflation uncertainty next year. This, Powell added, is part of the reason the Fed wants to be cautious lowering interest rates.

“It’s kind of common sense thinking that when the path is uncertain, you go a little bit slower,” Powell said. “It’s not unlike driving on a foggy night or walking into a dark room full of furniture. You just slow down.”

In a press conference Wednesday, Federal Reserve Chair Jerome Powell explained why the Fed now sees two interest rate cuts instead of the four initially expected in September.

“The slower pace of cuts for next year really reflects both the higher inflation readings we had this year and the expectation inflation will be higher,” he said. He added later that as long as the economy and labor market remain “solid,” “we can be cautious as we consider further cuts.”

Powell added that while downside risks to the labor market have “diminished,” there are still signs worth watching. The labor market is “looser than pre-pandemic and it’s clearly still cooling further,” he said. “We don’t think we need further cooling.”

The Federal Reserve lowered interest rates on Wednesday by 25 basis points to a range of 4.25%-4.5% at its final meeting of the year and signaled that it would slow down the pace of its cuts.

Along with its policy announcement, which lowered the benchmark interest rate to a range of 4.25% and 4.5%, the Fed released updated economic forecasts in its Summary of Economic Projections (SEP), including its “dot plot,” which maps out policymakers’ expectations for where interest rates could be headed in the future.

Fed officials see the fed funds rate ending 2025 at 3.9%, higher than the Fed’s previous September projection of 3.4%. Outside of September’s jumbo 50 basis point cut, the Fed has moved in 25 basis point increments over the last year or so, indicating the central bank expects to cut interest rates two more times in 2025.

Officials see two more additional cuts in 2026, bringing the fed funds rate down to 3.4%. In September, central bank officials had pegged interest rates peaking at 2.9% in 2026.

The SEP indicated the Federal Reserve sees core inflation peaking at 2.5% next year — higher than September’s projection of 2.2% — before cooling to 2.2% in 2026 and 2.0% in 2027.

Officials see the unemployment rate ticking up slightly to 4.3% in 2025, lower than the previous forecast of 4.4%. Unemployment is expected to remain at that level through 2026 and 2027.

The Fed increased its previous forecast for US economic growth, with the economy expected to grow at an annualized pace of 2.1% next year before cooling to 2.0% in 2026 and 1.9% in 2027.

In September, officials saw GDP growth at 2.0% in 2025, 2026, and 2027. It also revised its previous forecast of 2.0% growth in 2024 to 2.5%.

Read more here.

Not all Federal Reserve officials agreed with lowering interest rates at it today’s meeting.

Newly appointed Cleveland Fed president Beth Hammack objected, preferring not to cut rates. Her dissent marked the second dissent against a policy decision since September.

The Federal Reserve cut interest rates by 25 basis points, lowering its benchmark rate to a range of 4.25% to 4.5%.

The central bank also released its latest Summary of Economic Projections (SEP), including its “dot plot,” which maps out policymakers’ expectations for where interest rates could be headed in the future.

The median officials’ forecast for the federal funds rate at the end of 2025 was 3.9%, which would likely represent two cuts next year. As part of the Fed’s SEP, officials marked up their projections for core inflation and economic growth next year while lowering their forecast for the unemployment rate in 2025.

All three of the major averages are up 0.3% or less ahead of the Federal Reserve’s next interest rate decision.

Meanwhile, the 10-year Treasury yield (^TNX) is roughly flat, holding steady near 4.39%.

As Bespoke Investment Group pointed out, most of the fireworks on Fed day usually come once Fed Chair Jerome Powell takes the mic at 2:30 p.m. ET. Stay tuned.

We’re less than 90 minutes away from Federal Reserve Chair Jerome Powell grabbing the market’s attention with his final press conference of 2024.

Yahoo Finance’s Jennifer Schonberger previews what to watch Wednesday afternoon:

Investors widely expect the Federal Reserve to cut interest rates Wednesday by a quarter percentage point, the third and final reduction of 2024.

But their bigger question is whether the central bank is ready to scale back its expected cuts for 2025 — and how Chair Jerome Powell will address questions about the Fed’s path at his Wednesday afternoon press conference.

“Fed Chair Powell will face the delicate exercise of having to reconcile a 25 basis point rate cut with stronger economic and inflation projections and a more gradual policy easing trajectory,” said Greg Daco, chief economist for EY.

Rad more here.

Stocks are marginally higher on Wednesday, but as Fundstrat head of research Tom Lee points out this is no different than the largely “rangebound” price action seen since the November jobs report was released on Dec. 6.

Lee, who’s been calling for a year-end rally in markets, believes getting past the Fed decision this afternoon, no matter the outcome, is key to stocks getting their swagger back.

“We believe the year-end rally likely starts post-Dec FOMC rate decision,” Lee wrote in a note to clients on Wednesday morning.

Bank of America analysts offered a similar view in a research note on Monday, referring to today’s meeting as the “last hurdle” before the famed Santa Claus rally could take hold in markets.

Entering Wednesday’s Federal Reserve meeting, markets are pricing in a near 100% chance the Federal Reserve cuts interest rates by 25 basis points, per the CME FedWatch tool. But given recent data that showed the US economy is growing at a solid pace, the labor market isn’t rapidly cooling, and inflation’s path to the Fed’s 2% goal is proving bumpy, many expect the Fed will cut rates by less than initially thought in 2025.

This pushes investor focus to the Fed’s latest Summary of Economic Projections (SEP). That includes its “dot plot,” which maps out policymakers’ expectations for where interest rates could be headed in the future, as well as commentary from Powell during his press conference.

Largely, expectations are for the Federal Reserve to revise up its forecasts for inflation and economic growth in 2025 while revising down its unemployment rate projection. The sum of this data is expected to push the Fed to see a higher federal funds rate at the end of 2025 than officials projected at their September meeting.

But as Yardeni Research chief markets strategist Eric Wallerstein pointed out on X, markets have already largely priced in this outcome.

Given this, anything counter to the narrative will be key to watch when the SEP is released at 2 p.m. ET.

The Dow Jones Industrial Average (^DJI) is on its worst losing streak in nearly 50 years.

The major index has fallen for nine straight trading days, its largest stretch of consecutive declines since 1978. The move lower in the Dow comes as large-cap tech has largely been holding up the S&P 500 (^GSPC) and Nasdaq Composite (^IXIC) throughout December.

The Dow’s losses amount to roughly 3%, or more than 1,500 points, in the past nine trading sessions. The index has fallen from a record close of 45,014 on Dec. 4 to 43,499 as of Tuesday’s close. In that same time frame, the S&P 500 is down about 0.6%, while the Nasdaq Composite is up almost 2%.

Given the Dow’s construction, it’s not benefitting from the tech rally. Of the Dow’s 30 stocks, just four — Amazon (AMZN), Microsoft (MSFT), Apple (AAPL), and Nvidia (NVDA) — are members of the “Magnificent Seven” tech stocks. This means the Dow, unlike the S&P 500 and Nasdaq, hasn’t benefitted from massive rallies in Tesla (TSLA), which is up more than 37% in the past 10 days, or Alphabet (GOOGL,GOOG), which has risen 14% in the same time period.

Read more here.

Housing starts fell in November to the lowest rate since July, pressured by a drop in multifamily projects.

Data from the Census Bureau showed housing starts declined 1.8% from the previous month to an annualized rate of 1.29 million. Economists polled by Bloomberg were forecasting a 1.35 million pace.

November’s decline was driven by a 24% decrease in multifamily projects while starts of single family construction rose 6.4% to an annualized rate of 1.01 million.

“The increased supply of single-family homes coming to market should improve housing affordability in the new year, especially if mortgage rates fall,” Jeffrey Roach, chief economist at LPL Financial, wrote after the release.

The outlook for builders looks murky next year. Builders have been increasing housing construction over the past year as the existing home market lacked supply. However, inventory of new homes for sale has hit a 17-year high, according to Bloomberg.

“We … expect resilient new home sales to support single-family starts in the near- term. But with the supply of new homes at a post-[great financial crisis] high, the upside is limited,” Bradley Saunders, economist at Capital Economics, wrote after the release.

As Nvidia (NVDA) shares have fallen more than 10% over the past month, there’s been increasing conversation about growing competition in the AI chip space, some of which is even coming from Nvidia’s own customers.

But the stock rose more than 3% following an Information article that detailed how Nvidia could have a plan of its own to compete with the hyperscalers: Cloud services.

The report details that Nvidia has already been selling AI cloud services and it could eventually generate $150 billion in revenue from software and cloud services, per the Information. The move would help Nvidia continue to play a role in the build-out of AI as focus shifts from buying chips to the use cases for cloud software.

Stocks eyed a rebound Wednesday, with the blue-chip Dow looking to snap its longest losing streak since 1978. The Federal Reserve will take focus later with its latest interest rate decision.

The Dow Jones Industrial Average (^DJI) was up about 0.1%. Meanwhile, the S&P 500 (^GSPC) and tech-heavy Nasdaq Composite (^IXIC) were off about 0.1%.