U.S. stocks plummeted on Wednesday, marking the largest daily decline in months for all three major indexes. The drop followed the Federal Reserve’s decision to lower interest rates by a quarter percentage point, accompanied by projections signaling a more cautious approach to easing in 2025.
The Fed reduced rates by 25 basis points to a range of 4.25%-4.50% and, in its Summary of Economic Projections (SEP), indicated plans for an additional half-point rate cut by the end of 2025, reflecting a strong labor market and stalled progress on inflation.
“The changes to the statement of economic projections left the Fed with no other choice,” said Ellen Hazen, chief market strategist at F.L. Putnam Investment Management. “It’s clear the economy is running hotter than expected, prompting the Fed’s cautious stance and potential pause.”
The Dow Jones Industrial Average tumbled 1,123.03 points (2.58%) to 42,326.87, while the S&P 500 fell 178.45 points (2.95%) to 5,872.16, and the Nasdaq Composite dropped 716.37 points (3.56%) to 19,392.69.
This marked the Dow’s 10th consecutive loss, its longest streak since October 1974. The declines represented the steepest one-day percentage losses for the Dow and S&P since August 5, while the Nasdaq suffered its largest drop since July 24.
The small-cap Russell 2000 slumped 4.4%, its sharpest drop since June 2022, as smaller companies are more sensitive to rate cuts.
Despite Wednesday’s losses, year-to-date gains remain strong: the Dow is up 12.3%, the S&P has risen 23%, and the Nasdaq has surged 29%, driven by tech stocks, AI optimism, and expectations of deregulation under the incoming administration. However, concerns linger over potential inflationary impacts of proposed policies, such as tariffs.
The CBOE Volatility Index, a measure of market turbulence, soared 11.75 points to a four-month high of 27.62.
Treasury yields climbed following the Fed’s statement, with the 10-year note hitting 4.518%, its highest level since May 31. Ross Mayfield, an investment strategist at Baird, noted that yields near 5% remain a significant headwind for equity markets, raising questions about whether fiscal policies will be inflationary or pro-growth.
Markets are anticipating no rate changes at the Fed’s January meeting, with expectations for 33 basis points of cuts in 2025—down from 49 basis points initially priced after the Fed’s announcement.
Higher interest rates often weigh on equities by enhancing the appeal of safer investments and constraining corporate earnings growth. All 11 major S&P 500 sectors declined, led by real estate (-4%) and consumer discretionary (-4.7%).
Cryptocurrency-related stocks also plunged after Fed Chair Jerome Powell reiterated the central bank’s stance against owning Bitcoin. Speculation about government interest in cryptocurrencies under the new administration failed to stem the losses. MicroStrategy fell 9.5%, MARA Holdings dropped 12.2%, and Riot Platforms declined 14.5%.
On the NYSE, declining stocks outnumbered advancers by nearly 9.5-to-1, while the Nasdaq ratio was 5.46-to-1.
The S&P 500 recorded six new 52-week highs and 27 new lows, while the Nasdaq registered 80 new highs and 264 new lows. Trading volume on U.S. exchanges reached 18.59 billion shares, well above the 20-day average of 14.36 billion.
