The US stock market has been all over the shop this week.
The Nasdaq Composite Index (NASDAQ: .IXIC) and the S&P 500 Index (SP: .INX) both flirted with record highs on Monday. Good start.
However, fortunes changed on Wednesday when the US Federal Reserve decided to cut interest rates by 25 basis points.
Both indexes have taken a sharp turn in the hours following The Fed's announcement.
Meanwhile, the Dow Jones Industrial Average Index (DJX: .DJI) has endured its longest losing streak in nearly half a century this week, according to The Motley Fool's Sebastian Bowen.
What on earth is going on? Let's take a look.
Image source: Getty Images
Federal Reserve dampens holiday cheer
The US stock market was rattled this week. In its last policy meeting for the year on Wednesday, the US Federal Reserve cut interest rates by 25 basis points, bringing the country's target rate to 4.25% – 4.50%.
Market pundits widely anticipated the cut. What they didn't expect, however, was Fed Chair Jerome Powell's statements on interest rate cuts next year.
Powell said the Fed expects to cut interest rates just twice over the next twelve months, compared to a previous forecast of four cuts in 2025.
That means interest rates are likely to stay elevated in the US for the foreseeable future.
On the upside, Powell also said the US economy was growing strongly. But this comes with a trade-off – inflation.
He noted that inflation had been moving "sideways" but was at around 2.6%.
It was previously forecast to be around 2.2% by the end of next year, but last night, it was revised to 2.5%.
Investors reacted negatively to the Fed meeting. The Dow Jones Industrial Index finished 2.6% lower on the day. Meanwhile, the tech-heavy NASDAQ-100 Index (NASDAQ: NDX) fell more than 3.5%.
According to CFRA Research, the Fed's "admitted uncertainty" started a selling wave in the US stock market. Per CNN:
The Fed's admitted uncertainty as to monetary policy actions in 2025, combined with the expectation of only two cuts in 2025 amplified investor uncertainty and concern, triggering profit taking this year versus delaying into the new year.
The selling pressure has also spilled into the Aussie market today. The S&P/ASX 200 Index (ASX: XJO) is down 2% at the time of writing.
What's the outlook for the US stock market?
The US stock market is expected to gain about 9% to 10% over the next year, according to Goldman Sachs projections.
It measures this by the expected returns of the S&P 500 Index for 2025, predicting it will finish the year at 6,500 points.
The benchmark index of US equities is projected to rise to 6,500 by the end of 2025, a 9% price gain from its current level and a 10% total return including dividends…earnings are predicted to increase 11% in 2025 and 7% in 2026.
The 'Magnificent 7' group of stocks, made up of seven of the largest companies by market value in the index, have outperformed in 2024. Goldman expects this to continue.
But the "S&P 493" – that is, the remaining 493 shares in the index after removing the 'Magnificent 7' – could be in a good spot.
With uncertainties on "trade friction", Goldman says companies with most of their revenues in the US could benefit.
"Trade policy risk also favors the S&P 493, which has a greater share of earnings derived domestically relative to the Magnificent 7", it writes.
"The Magnificent 7 derive nearly half of their sales from outside the US compared with 26% for the S&P 493".
Foolish takeout
The US stock market has been volatile this week, as investors sold down their shares after the US Fed meeting on Wednesday.
The Fed lowered interest rates, but investors see potential risks on the horizon with just two rate cuts planned next year. Chief among these is inflation.
Time will tell what happens from here.
