(Bloomberg) — A rally that had briefly pushed stocks to all-time highs hit a wall when the Federal Reserve signaled it was in no hurry to ease monetary policy after cutting interest rates by half a percentage point.

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The S&P 500 gave up as much as 1% of a gain as Jerome Powell warned against expecting a continuation of sharp rate cuts. While that’s not necessarily a bad thing, as aggressive easing is usually associated with economic stress, traders ended up pushing stocks to a session low by 4 p.m. in New York.

“After a rally ahead of today’s Fed announcement, it would not be unreasonable for the market to pull back a bit,” said eToro’s Bret Kenwell. “However, the long-term outlook remains promising. As long as the economy holds up and inflation does not flare up again, lower interest rates and strong earnings growth can continue to drive stock prices higher over the long term.”

For Ian Lyngen and Vail Hartman of BMO Capital Markets, Powell’s press conference was emblematic of the magnitude of the rate cut and made it clear that policymakers are not particularly worried about any aspect of the real economy at the moment.

“It is impressive that despite the classic ‘buy the rumor, sell the fact’ dynamic of the 50 basis point cut, selling still occurred. Positions are being balanced out and the market is returning to the mode of trading the upcoming economic data with an eye on the potential impact of the presidential election campaign.”

The S&P 500 fell 0.3 percent. The Nasdaq 100 lost 0.5 percent. The Dow Jones Industrial Average lost 0.2 percent. An index for the “Magnificent Seven” of megacaps slipped 0.1 percent. The Russell 2000 of small companies remained little changed.

The yield on 10-year US government bonds rose seven basis points to 3.71 percent. The dollar rose.

Wall Street’s reaction to the Fed:

It will now be a battle between market expectations and the Fed, with employment data – not inflation data – deciding which side is right. Since this policy move was largely announced, there was no outsized movement in financial markets. Now everyone is again dependent on data.

The Fed is hitting out with a big rate cut while trying to put a positive spin on the economic outlook. But these two facts don’t fit well together. Be careful, a big rate cut in a weakening environment has always preceded a market decline. It’s possible that we’ve seen the top of the market today.

The story continues

History shows that the market peaks very close to the first rate cut. In fact, this time the market may peak right at the time of the rate cut. Be careful with your stocks. Times are changing.

The big exit provides some insurance for a soft landing, is risky and should particularly benefit risky, cyclical investments such as small caps, cyclical stocks, commodities and commodity currencies.

The Fed has been more aggressive than I expected, as 50 basis point rate cuts are historically associated with crises. I do not consider forecasts of 2% GDP, 4.2% unemployment and 15% earnings growth for 2025 to be a crisis, so I am still skeptical about the magnitude of the expected rate cuts next year.

Lower market interest rates are likely to benefit housing construction and employment.

We expect traditional beneficiaries, including small caps, value and cyclical sectors, and the equally weighted S&P 500 index, to experience tailwinds.

The Fed has brought forward this rate-cutting cycle with a massive 50 basis point cut and signaled in its statement that it is fully focused on the labor market, declaring that it is “firmly committed to supporting maximum employment.”

While they pay lip service to the other part of their dual mandate (namely inflation), they have clearly lost sight of this point. And while inflation is now much lower than at the peak we saw in 2022, triggering a stock market rally and fueling a growing economy with lower interest rates risks allowing inflation to spike again before this bull market ends.

However, we expect the market to experience some volatility as the election approaches, so we will cut rates now and announce further cuts of 50 basis points by the end of the year and a further 150 basis points in total by the end of next year.

The 50 basis point cut should reduce the likelihood of a hard landing and this prospect provides hope for the stock market as the economy and corporate earnings typically move in lockstep.

In line with the lower likelihood of a hard landing, cyclical sectors led the day while defensive stocks were the laggards.

We see this as confirmation that equities can deliver further gains in 2025, led by U.S. large caps and a combination of growth and cyclical sectors.

Despite skepticism about the economic necessity of a drastic 50 basis point cut, markets can and should only celebrate today’s move – and will continue to do so in the months to come. We have a Fed that will go to historic lengths to avoid a hard landing. Recession, what recession?”

By cutting the key interest rate by 50 basis points (instead of 25 basis points), the Fed met market expectations that a deeper rate cut would be the start of a rate-cutting cycle.

The Fed demonstrated today that it is very committed to protecting maximum employment and that it has effectively pushed inflation fears into the background.

Perhaps even more important than the magnitude of the first rate cut of this cycle is the revision to the Fed’s dot plot, which suggests that the Fed is poised to be aggressive and cut rates by another 50 basis points by year-end.

Stock markets welcomed the Fed’s decision to begin its easing cycle with 50 basis points.

The announcement certainly came as no surprise given the numerous discussions that accompanied this move. However, the lack of guidance from Fed officials suggests that despite the single dissenting opinion, there must have been vigorous discussion and work to reach consensus.

Stocks love a good Fed put.

I think the Fed may have acted prematurely with 50 basis points. The economy is slowing, but it’s still strong. My criticism of the Fed is that they’re myopically focused on backward-looking data. This feels like that. One weak jobs report and here we are.

A 50 basis point cut at the beginning of the rate-cutting cycle is significant because the Fed has a history of having to play catch-up at the beginning of rate-cutting cycles.

The message is: The Fed stands behind the labor market.

The markets got what they wanted – a first big rate cut from the Fed. Now we will see if they remain happy with it. The Fed has a well-deserved reputation for not wanting to rush things, so if it moves too slowly, there is a risk of some disappointment, especially if economic data continues to weaken. But today it delivered.

A winding down of restrictive monetary policy could extend the US economic cycle – which would benefit both bonds and risk assets – but investors should be wary of tail risks. However, positive catalysts in a stable economic environment and now falling interest rates continue to feed into the “soft landing” narrative.

Easy money from savings accounts and certificates of deposit will decline. Investors should look to lock in higher interest on their cash with shorter-term fixed income investments. A focus on bond market opportunities rather than benchmark-focused investments can help boost yields and total returns. Across the credit spectrum, both macro and spread opportunities should attract investors.

A stable economic environment and lower interest rates should increase opportunities in equities. For small-cap stocks, a favorable valuation framework meets an improved earnings forecast for 2025 and creates opportunities in healthcare, particularly in biotechnology, as well as in the software sector in the technology sector and in insurance stocks in the financial sector.

Company highlights:

• A U.S. security panel has given Nippon Steel Corp. permission to resubmit its plans to acquire United States Steel Corp. for $14.1 billion, likely postponing a decision on the politically controversial takeover until after the U.S. elections in November, people familiar with the matter said.

• Google has won a legal battle with the European Union over a 1.5 billion euro ($1.7 billion) fine for hindering competition in online advertising, partially making up for last week’s crushing defeat in another ruling for abusing its monopoly position.

• Qualcomm Inc. has lost a legal battle before the European Court of Justice over a multi-million euro fine. The US company was accused of setting the price of certain chips so low that it was able to force a smaller competitor out of the market.

• T-Mobile US Inc. on Wednesday outlined its growth ambitions for the next three years, forecasting higher profits due to increasing customer numbers and the use of new technologies, including artificial intelligence.

• A union official said Elliott Investment Management is still interested in replacing Southwest Airlines CEO Bob Jordan, suggesting that changes the airline has already promised are not enough to satisfy the activist shareholder.

• Anne Wojcicki, co-founder and chief executive officer of 23andMe Holding Co., told employees that she remains committed to privatizing the genetic testing company even after the independent board members resigned.

Important events this week:

• Interest rate decision UK, Thursday

• US Conf. Board’s leading index, initial jobless claims, existing home sales, Thursday

• FedEx results, Thursday

• Japan’s interest rate decision, Friday

• Consumer confidence in the Eurozone, Friday

Some of the key market movements:

Shares

• The S&P 500 fell 0.3% at 4 p.m. New York time

• The Nasdaq 100 fell 0.5%

• The Dow Jones Industrial Average fell 0.2 percent

• The MSCI World Index fell by 0.4 percent

• Bloomberg Magnificent 7 Total Return Index fell 0.1%

• The Russell 2000 Index remained barely unchanged

Currencies

• The Bloomberg Dollar Spot Index rose 0.1%

• The euro was little changed at 1.1105 dollars

• The British pound rose 0.2% to $1.3187.

• The Japanese yen remained virtually unchanged at 142.46 per dollar.

Cryptocurrencies

• Bitcoin fell 0.1% to $60,055.19

• Ether fell 1.3% to $2,314.6.

Bonds

• The yield on 10-year government bonds rose seven basis points to 3.71%

• The yield on German 10-year bonds rose by five basis points to 2.19 percent

• The yield on British 10-year bonds rose eight basis points to 3.85 percent

Raw materials

• West Texas Intermediate crude oil fell 1.7 percent to $70.01 a barrel

• The spot price of gold fell 0.8 percent to $2,549.44 per ounce.

This story was created with the assistance of Bloomberg Automation.

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