U.S. stocks fell sharply on Wednesday, erasing earlier gains after the Federal Reserve announced a 25 basis point rate cut and projected a slower pace of rate reductions for next year. The Fed’s decision brought interest rates to the 4.25%-4.50% range. The central bank’s summary of economic projections (SEP) indicated a total of only half a percentage point in cuts by the end of 2025, citing a solid labor market and a stall in inflation reduction.
The S&P 500 dropped 178.45 points, or 2.95%, to 5,872.16. The Nasdaq Composite fell 716.37 points, or 3.56%, to 19,392.69, while the Dow Jones Industrial Average plunged 1,123.03 points, or 2.58%, to 42,326.87. The Dow’s decline marked its 10th consecutive losing session—the longest streak since October 1974.
Despite these declines, year-to-date gains remain significant. The Dow is up nearly 15% in 2024, the S&P 500 has risen about 26%, and the Nasdaq has surged by almost 33%. The gains have largely been driven by technology companies, excitement around artificial intelligence, and expectations for a lower rate environment. Additionally, hopes for deregulation under President-elect Donald Trump’s administration have provided recent support. However, concerns persist that Trump’s policies, such as tariffs, could reignite inflation.
Investor anxiety was evident as the Cboe Volatility Index (VIX) rose 8.0 points to a four-month high of 23.87. U.S. Treasury yields also climbed, with the benchmark 10-year note reaching 4.51%, its highest level since May 31.
“You’ve got the 10-year creeping back up, around that 4.5% and particularly the 5% level that’s been a real problem for equity markets,” noted Ross Mayfield, investment strategist at Baird. He added that investor sentiment in the first quarter of 2025 will likely depend on whether Trump’s policies are viewed as inflationary or pro-growth.
All 11 major S&P 500 sectors closed lower, with real estate and consumer discretionary stocks leading the losses. Higher interest rates typically dampen equity markets by making safer assets more attractive and restricting corporate growth potential.
Cryptocurrency-related stocks also fell after Fed Chairman Jerome Powell clarified that the central bank cannot own bitcoin and does not seek legislative changes to allow it. Speculation had grown that Trump’s administration might advocate for a government-owned bitcoin reserve. MicroStrategy, MARA Holdings, and Riot Platforms all closed with significant losses.
The outlook remains uncertain as investors navigate the impact of Fed policy, rising Treasury yields, and potential changes under the incoming administration.
