Fed Rate Cut Fuels Market Rally as Investors Build on Recovery Base

Stock markets bounced back strongly on Wednesday, with the S&P 500 climbing +0.67%, the Nasdaq 100 advancing +0.42%, and the Dow Jones Industrial Average surging +1.05%. December futures on both the S&P 500 and Nasdaq 100 rose +0.66% and +0.44% respectively, signaling continued upside momentum. The broader rally saw major indices post their strongest weekly performance in recent weeks, with the S&P 500 hitting a 6-week high, marking a solid recovery base for further gains.

Fed’s Dovish Pivot Catalyzes Market Recovery

The catalyst behind this rally was the Federal Reserve’s decision to cut the federal funds rate by 25 basis points to 3.50%-3.75%, with Fed Chair Powell striking a notably softer tone than investors had anticipated. The FOMC’s 9-3 vote signaled the central bank may be approaching the end of its cutting cycle, stating it would assess “the extent and timing of additional adjustments” to rates going forward.

Powell’s commentary proved crucial to investor sentiment, emphasizing that the Fed now sits “within a range of plausible estimates of neutral” and noting that a rate hike is not “anybody’s base case” for future policy moves. This dovish framework provided the foundation for the rally, as markets interpreted the guidance as fewer aggressive tightening surprises ahead.

Economic Projections and Liquidity Support

Beyond the rate cut, the Fed upgraded its 2025 GDP forecast to 1.7% from 1.6% and simultaneously lowered its core PCE inflation projection to 3.0% from 3.1%, suggesting policy makers see moderating price pressures. For 2026, the central bank raised its growth estimate to 2.3% from 1.8% while trimming its inflation outlook to 2.5% from 2.6%.

To bolster financial system liquidity, the Fed announced it will purchase $40 billion in Treasury bills monthly beginning December 12, rebuilding cash reserves that had been depleted during its balance sheet reduction phase. This fresh liquidity injection provided additional support for the market’s upside push.

Employment Softness and Bond Market Reprieve

Supporting the dovish narrative, the U.S. Q3 employment cost index rose just +0.8% quarter-over-quarter, slightly below the +0.9% expected. This softer wage growth reading eased inflation concerns and reinforced expectations for a patient Fed. Additionally, MBA mortgage applications climbed +4.8% for the week ending December 5, though purchase applications declined -2.4% while refinancing surged +14.3%. The 30-year fixed mortgage rate ticked up 1 basis point to 6.33%.

Treasury markets responded positively to this backdrop. The 10-year T-note yield retreated 4.1 basis points to 4.147%, rebounding from its 3-month highs amid renewed confidence in a measured Fed approach. Bond futures advanced as investors repriced rate expectations following Powell’s cautious guidance.

Semiconductor Sector Leads Gainers

Individual stocks showcased a broad-based rally across multiple sectors. Semiconductor manufacturers were particularly strong, with Micron Technology and Marvell Technology each climbing over 4%, while Applied Materials and Qualcomm rose more than 3%. Smaller-cap chipmakers including Analog Devices, Broadcom, and Texas Instruments all gained more than 1%, reflecting investor appetite for cyclical technology plays in a more accommodative rate environment.

Earnings Momentum Supports Equity Rally

Corporate earnings season neared completion with 495 of 500 S&P 500 companies having reported. According to Bloomberg Intelligence, 83% of reporting companies beat expectations on track for the best quarter since 2021, with aggregate earnings up 14.6%—more than doubling the initial +7.2% year-over-year forecast. This earnings outperformance provided fundamental credibility to the equity rally.

Individual Stock Movers Reflect Market Dynamics

GE Vernova led gainers, surging over 15% after expanding its buyback program to $10 billion and doubling its quarterly dividend to 50 cents. Photronics jumped more than 45% following better-than-expected Q4 results and an upbeat Q1 forecast. EchoStar advanced over 10% on a Morgan Stanley upgrade to overweight, while Middleby Corp. climbed 9% following a Jeffries buy rating.

On the downside, mobility and delivery platforms retreated as Amazon.com expanded same-day grocery delivery to over 2,300 cities. Maplebear fell more than 6%, Uber declined over 5%, and DoorDash dropped more than 4%. AeroVironment tumbled 13% after trimming its 2026 earnings guidance, while Netflix fell more than 4% and GameStop declined more than 4% on separate company developments.

Global Markets and Rate Implications

Overseas markets finished lower, with China’s Shanghai Composite and Japan’s Nikkei 225 each declining modestly, while European bourses similarly retreated. However, European government bond yields climbed as ECB President Lagarde signaled potential economic growth forecast upgrades, with the 10-year German bund yield touching an 8.75-month high of 2.895%.

Markets are currently pricing just a 22% probability of another 25 basis point Fed cut at the January 27-28 FOMC meeting, suggesting investors view Wednesday’s decision as part of a lengthy pause ahead.