If you had to pick a defining driver of the stock market over the first several months of 2025, it would probably be President Donald Trump’s tariffs.
Then the middle section of the year was overtaken by the red-hot AI trade, which pushed the S&P 500 more than 20% higher from May through October.
Since late October, however, there’s been one indisputable driver of stock returns in the US: the Federal Reserve. With the central bank set to start its two-day policy meeting today — and with its next interest-rate decision due tomorrow — it’s rightfully commanding the majority of investor attention.
Since the Oct. 29 FOMC meeting, the equity-market playbook has been simple: signals of future rate cuts have been stocks-positive, while any hawkishness has been greeted with selling.
The chart below shows the dynamic in action, with a hawkish Fed decision marking the recent market top and sparking a prolonged sell-off, only for dovish comments to right the ship and push the index back near record highs.
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With all of this activity around the Fed, the AI trade remains formidable. The stock prices of mega-cap tech titans have, however, been increasingly dictated by the shifting sands of monetary policy. These companies have a lot riding on their ability to borrow at favorable rates, so they can keep spending tens of billions on AI. This informs the V shape in the chart above.
With odds of a 25-basis-point cut currently set at 87%, it seems all but certain that a December cut is coming. That’s probably not what’s going to move the market on Wednesday, or serve as another inflection point for stocks.
What investors will be focused on is signals of further rate cuts to come. There’s only a 23% chance of another cut in January being implied right now. The odds for a second cut by the March Fed meeting are only slightly higher, at 37%.
Based on those percentages, investors aren’t asking for much. Maybe a few dovish breadcrumbs will hold them over.
But will the Fed play ball? The expectation is that they’ll take a largely data-dependent stance, and kick the can down the road until more economic figures are available. How investors digest that will likely dictate the stock market’s direction over the next few weeks.
