Bullish or Bearish Momentum After Most Optimistic Rate-Cut Expectations Mixed

The Fed's latest move—a quarter-point cut with a forecast of two more in 2025 but only one in 2026—presents a mixed signal.

Here is a breakdown of the likely market dynamics and whether a bearish momentum is on the horizon.

1. What the Fed Did vs. What the Market Expected

Fed Action: A quarter-point cut now, with guidance for two more in 2025 and only one in 2026.

Market Expectation (before meeting): Futures pricing suggested investors were betting on faster and deeper easing (3–4 cuts in 2025).

This creates a gap between expectations and Fed guidance.

2. Market Reaction Dynamics

Equities: Stocks have been rallying partly on hopes of aggressive cuts → If the Fed signals a slower pace, the market may reassess valuations, especially in high-duration sectors (tech, growth).

Bonds/Yields: Yields may rise back up at the long end if markets dial back the “rapid cuts” thesis. That tightens financial conditions modestly. $iShares 20+ Year Treasury Bond ETF(TLT)$ $US Treasury 10 Year Note ETF(UTEN)$

Dollar: Could strengthen if rate differentials stay wider than expected, putting pressure on risk assets (EM, commodities).

3. Momentum Outlook

Bearish Risk: If traders unwind the “early cuts” trade, momentum could turn bearish short term, especially after a strong run-up into the Fed.

Neutralizing Factors: However, if growth data stays solid and inflation continues to cool, the market could interpret the Fed’s stance as a soft landing baseline rather than hawkish.

So it is less a full “bearish reversal” and more a repricing phase: volatility and pullbacks possible, but not necessarily a breakdown unless economic data deteriorates.

4. Key Watchpoints

Fed Speak: If Powell and other Fed officials emphasize “gradualism,” that could cap bullish momentum.

Data Dependence: Inflation prints (CPI, PCE) and labor data will determine whether the Fed’s dots hold or markets reprice again.

Technical Levels: Watch whether indices hold recent breakout levels (e.g., S&P 500 ~5,600 zone). Failure could signal shift to consolidation/bearish momentum.

Will the Market Be Withdrawing the Early Pricing?

Markets may withdraw some of the “early and aggressive cuts” pricing, leading to short-term consolidation or pullback (mild bearish momentum). But unless growth softens materially, this is more of a positioning reset than the start of a major downtrend.

The market is likely to be adjusting its expectations. The key is how investors interpret the Fed's reasoning.

A "Muted" Dovishness: While a rate cut is a dovish (pro-growth) action, the forecast for a slower pace of cuts in 2026 suggests the Fed remains cautious. It indicates that the central bank is not yet fully confident that inflation is under control. The Fed is in a difficult position, as it faces the twin challenges of a slowing labor market and stubbornly high inflation, exacerbated by tariffs. This "unusual" situation, as Chairman Powell described it, means the Fed's actions are more about "risk management" than a full-fledged endorsement of a strong economy.

Potential for Volatility: The market could reprice itself as investors digest the implications of a longer, more drawn-out easing cycle. Sectors that are highly sensitive to interest rates, such as real estate and smaller companies (Russell 2000), could see renewed volatility. The initial surge in the Russell 2000 following the decision, followed by a paring of gains, is a clear sign of this repricing. $Cboe Volatility Index(VIX)$

Is the Market Heading for a Bearish Momentum?

It is not a clear-cut path to a full-blown bearish market, but the risk has increased.

Increased Uncertainty: The Fed's guidance injects a new layer of uncertainty. Investors were hoping for a clearer signal that the Fed was shifting to a sustained easing cycle. Instead, they got a "wait and see" approach, with a lot of emphasis on future data. This lack of a strong, definitive dovish stance could dampen investor sentiment.

Risk of Stagflation: The Fed's statement explicitly noted that "job gains have slowed" while "inflation has moved up and remains somewhat elevated." This is a classic recipe for stagflation, a scenario of high inflation and slowing economic growth. While the Fed believes it's managing these risks, the market may see this as a significant headwind.

Mixed Signals: While the overall outlook is more cautious, some factors could prevent a prolonged bearish momentum. The rate cut itself still provides a degree of monetary stimulus, and a slowing labor market could eventually lead the Fed to cut rates more aggressively if the economy weakens further. The market will now be highly dependent on every new piece of economic data, from jobs reports to inflation figures.

In the next section, we will frame up the year-end equity scenarios under the Fed’s updated rate path. The focus is on $S&P 500(.SPX)$ as the benchmark, but you can also apply the same logic to Nasdaq / Mag 7 dynamics.

Scenario Sketch for Equities into Year-End 2025

1. Bull Case (30% probability)

Drivers:

• Inflation continues to cool faster than expected → gives Fed more flexibility to ease.

• Corporate earnings surprise to the upside (AI/tech demand + resilient consumer).

• Global growth stabilizes (no hard landing in China/Europe).

Market Reaction:

• Fed cut path seen as “conservative baseline” → market bets more easing is possible.

• Multiple expansion resumes, high-beta sectors (tech, small caps) outperform.

Target Range: S&P 500 → 6,000–6,200 (+8–12% from ~5,600).

Momentum: Strong upside led by Mag 7, then broadening rally.

2. Base Case (50% probability)

Drivers:

• Fed sticks to “gradual cuts” path (3 in 2025, 1 in 2026).

• Inflation drifts lower, but sticky enough to prevent faster cuts.

• Earnings in line with consensus, valuation already rich, limiting upside.

Market Reaction:

• Market reprices slightly downward from aggressive cuts but stabilizes.

• Rotation into cyclicals/value + moderate gains in large-cap tech.

Target Range: S&P 500 → 5,500–5,800 (flat to modest +3–4%).

Momentum: Choppy, sideways-to-slightly bullish trend.

3. Bear Case (20% probability)

Drivers:

• Inflation re-accelerates or remains sticky → Fed delays further cuts.

• Growth data weakens → stagflation fears emerge.

• Geopolitical shock or credit event adds stress.

Market Reaction:

• Market unwinds “soft landing” narrative.

• Earnings expectations revised lower, valuations compress.

• High-duration equities (tech) hit hardest.

Target Range: S&P 500 → 5,000–5,200 (-7–10%).

Momentum: Bearish, with rising volatility and defensive sector rotation.

Takeaway

Most Likely (Base Case, 50%): A choppy but contained market where the Fed’s slower cut path caps upside but doesn’t trigger a major selloff.

Upside Risk (Bull, 30%): If disinflation accelerates, equities could break higher and re-test momentum highs.

Downside Risk (Bear, 20%): Sticky inflation + growth slowdown = risk-off move, especially in tech.

Summary

In summary, the market is likely to pull back from its most optimistic rate-cut expectations. While a full-fledged bearish turn is not guaranteed, the risk of a more volatile and cautious trading environment has increased. The Fed's message is that the path forward is complex, and investors should not assume a smooth, long-term easing cycle.

Appreciate if you could share your thoughts in the comment section whether you think we should adjust our portfolio to prepare us for a more volatile trading as we moved into 2026.

@TigerStars @Daily_Discussion @Tiger_Earnings @TigerWire @MillionaireTiger appreciate if you could feature this article so that fellow tiger would benefit from my investing and trading thoughts.

Disclaimer: The analysis and result presented does not recommend or suggest any investing in the said stock. This is purely for Analysis.