Market expectations too high? US stocks lose momentum, three major indices briefly turn negative

The surge in US stocks triggered by the dovish turn of the Federal Reserve lasted only one day. The market retreated the day after the Fed meeting, with all three major US stock indices briefly turning negative.

The Dow Jones Industrial Average, which had risen nearly 200 points to hit a new intraday high on Thursday, briefly turned negative and fell nearly 40 points from its daily low. The S&P 500, which had risen nearly 0.7% from its daily high, also turned negative and fell nearly 0.3%. The Nasdaq Composite, which had risen over 0.8% from its daily high, also fell over 0.6%.

Although all three indices rebounded afterwards, such performance has raised doubts about whether the market is running too fast and rising too high.

Some analysts pointed out that after rising more than 1% on Wednesday, the S&P 500 is approaching its historical high, with its valuation and technical indicators entering overbought territory, suggesting that the US stock market may be vulnerable to a correction. In addition, mega-cap tech stocks are facing pressure.

Wall Street Journal noted that the Nasdaq 100, which has risen more than 50% since the beginning of the year, failed to regain its upward momentum after turning negative on Thursday. On the day the Fed signaled a rate cut, seven major tech stocks, including Apple, Microsoft, Alphabet-C, Meta, Nvidia, Tesla, and Amazon, had limited gains and did not join the market's "rally" camp. On Thursday, except for Tesla, the other six stocks all turned negative, becoming the main drivers of the market's decline.

At the same time, Wall Street Journal also pointed out that some media outlets have suggested that the current pricing by investors reflects their expectation of a total of six 25-basis-point rate cuts by the Federal Reserve next year, totaling 150 basis points. Goldman Sachs adjusted its expectations after the Fed meeting, predicting that the Fed will cut rates earlier and more aggressively next year, with a total cut of 125 basis points in five moves. The latest interest rate path projections released by the Fed on Wednesday showed that most Fed officials expect three rate cuts totaling 75 basis points next year.

Callie Cox, an investment analyst at eToro, commented, "We are a bit nervous about the next few weeks. The stock market needs to be watched closely. Since the end of October, we have not seen a 1% pullback in the S&P 500. The trade betting on a rate cut has been strong, but don't be surprised if it cools down. It shouldn't change your view of the favorable environment we are in."

Some commentators also pointed out that although Wall Street traders are all-in on betting on the Fed's major turn next year, it does not guarantee that the market excitement will continue. In the past two years, the market has bet on rate cuts multiple times, only to be caught off guard when the Fed did not take action. It is not difficult to imagine that in the coming months, if there are unexpected data on CPI or employment, it may prompt traders to change direction. However, no one was worried about this after the Fed meeting on Wednesday afternoon. The overseas team of CICC released an analysis after the Federal Reserve meeting, stating that the Fed's softened attitude in this meeting means the end of rate hikes will be officially announced, and rate cuts may come earlier. However, the CICC macro team pointed out that there is still a lot of uncertainty in the Fed's rate cut path next year, and stubborn inflation and the risk of economic non-landing may affect the direction of monetary policy.