Jamie Spencer
The U.S. stock market rally hit a major roadblock on Wednesday as the Federal Reserve signaled fewer rate cuts for 2025 than previously expected, raising Treasury yields and stoking concerns about elevated inflation. The Fed’s updated outlook, combined with economic uncertainty surrounding incoming President Donald Trump’s policies, has heightened volatility in financial markets.
The Fed’s Hawkish Turn
The Federal Reserve announced its third consecutive rate cut but reduced its forecast for 2025 rate reductions from four to two. This unexpected hawkish pivot rattled investors, driving stocks lower and pushing Treasury yields and the dollar higher.
The central bank also raised its inflation expectations for next year, complicating its ability to lower rates further. “Rates are the biggest risk for markets from here on out,” said Matthew Miskin, co-chief investment strategist at John Hancock Investment Management.
Impact on Stocks and Other Assets
The Fed’s announcements triggered significant market movements:
- S&P 500: Dropped nearly 3%, marking its worst one-day performance since August.
- Nasdaq: Fell 3.6%, reflecting heightened sensitivity among tech stocks to rising yields.
- Global Markets: European stocks slid 1.5%, and MSCI’s world stock index hit a six-week low.
- Treasury Yields: The 10-year yield reached 4.54%, its highest in six and a half months.
- Dollar Index: Soared to a two-year high.
- Gold: Declined by 2%, as higher yields made non-yielding assets less attractive.
Treasury Yields: A Growing Concern
Rising Treasury yields are increasingly weighing on equity valuations, particularly with the S&P 500 trading at a forward price-to-earnings ratio of 22—well above its long-term average of 15.8.
Michael Mullaney, director of global markets research at Boston Partners, warned that “yields are going to become more of a problem,” projecting the 10-year yield to climb to 5% next year.
Higher yields also present a competitive alternative to stocks, potentially drawing investor interest away from equities.
Trump’s Inflationary Policies Add Uncertainty
The policy backdrop is further complicated by the impending presidency of Donald Trump. His plans to raise tariffs and implement economic stimulus measures are expected to boost growth but could also fuel inflation.
“His policies on paper are inflationary,” Mullaney said, adding to concerns that the Fed may have less room to cut rates.
Investor Sentiment: Divided Outlook
The Fed’s more cautious stance has eroded some investor confidence, with Jack McIntyre of Brandywine Global noting that the central bank failed to provide a convincing rationale for its policy shift.
Still, many market participants remain optimistic. Jason Draho, head of asset allocation Americas at UBS Global Wealth Management, highlighted that the Fed is still biased toward rate cuts, which could support equities in the long term. UBS projects a 12% rise in the S&P 500 by the end of next year, with a target of 6,600.
“The Fed is still biased towards cutting,” Draho said. “It’s a direction that still is supportive for valuations, is still supportive for stocks to be higher.”
Looking Ahead
With Treasury yields breaching key levels and equity valuations under pressure, the market faces a challenging path forward. Investors are also bracing for the economic implications of Trump’s policies, which could add another layer of complexity to the Federal Reserve’s balancing act.
While optimism about corporate earnings and economic resilience persists, the combined effects of rising yields, inflation concerns, and geopolitical uncertainty may keep markets volatile in the months ahead.
