At the final FOMC meeting of 2024, Fed Chair Powell cut rates by 25 bps as expected, but the dot plot showed only two cuts in 2025, triggering a selloff: the Dow dropped 1000 points, Nasdaq fell 3.56%, and the S&P 500 lost nearly 3%. The panic stemmed from three factors: first, one official (Cleveland Fed President) dissented; second, markets had expected 3-4 cuts, but the dot plot showed only two, with the 2025 median rate rising from 3.4% to 3.9%; third, rate projections for 2026, 2027, and the long run were all revised upward, signaling that medium- to long-term inflation may pick up while unemployment concerns fade.
Looking at past meaningful Nasdaq corrections on a weekly basis:
The first correction lasted longer but was shallow, only about 10%, followed by a 45% rally driven by AI hype.
The second correction was deeper but quicker, about 15% over two months, and has since rallied nearly 19%.
From an opportunity perspective, this week's PCE data came in slightly below expectations, suggesting near-term inflation pressure is easing. Core US economic data continue to show strength and resilience. Major tech earnings remain solid, and with AI applications gradually rolling out, US corporate profitability could reach new highs. On the risk side, the Nasdaq and S&P 500's P/E ratios (market-cap weighted) are above the 90th percentile over the past 3, 5, and 10 years. Valuations are high. Additionally, policy uncertainty, high inflation, and potential recession risks persist. While short-term inflation is below the danger threshold, long-term trends are upward. Moreover, shifting expectations for Fed rate cuts could cause greater volatility. If the economy weakens more than expected or inflation reaccelerates, stocks could face further downside. From a policy angle, key risks for next year include: the Fed turning hawkish due to Trump's policies reigniting inflation; whether Trump's policies will actually boost the economy; and the "America First" approach potentially triggering retaliatory measures from trade partners. Overall, I lean optimistic on US stocks at this stage—opportunity outweighs risk.
Risk disclaimer: This article is for informational purposes only and does not constitute investment advice. Markets are risky; invest with caution.
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