Market Minute: Near Term Investor Sentiment Suggests Caution

U.S. stocks indicate a lower open again on the back of near term selling that wiped out almost all of the gains in the S&P 500 index since election day. The Fed reduced interest rates by 25-basis points this week as expected, but unsettled investors after Summary of Economic Projections (SEP) laid out a clear case for why the central bank projected just two rate cuts for 2025 versus the four it forecast in September. Inflation forecasts have been adjusted higher and therefore, the projections for further rate cuts have been cut back, leading to a rise in 10-year Treasury rates. Powell alluded to an economy that is performing exceptionally well. However, the uncertain policy framework around international trade restrictions, immigration and fiscal spending complicates economic projections. The Fed’s goal of maintaining higher for longer rates is to apply enough pressure on consumer demand and business activity to gradually push inflation back to the bank’s 2% target without harming the jobs market or the economy more broadly.

Leading up to the FOMC meeting, equity market gains had become narrowly concentrated in a few mega cap technology names and sentiment was largely bullish. This unusually narrow and extremely crowded positioning may have exasperated the selling, tipping the balance of sentiment to the downside in the near term.