For the first time in 2025, traders are pricing in three interest-rate cuts, and there is now about a 50/50 chance that the Federal Reserve will cut rates as early as May. That marks a sharp change from last week, when most market participants expected interest rates to remain unchanged.
Although lower borrowing costs would typically boost spending by consumers and investment by businesses, markets have weakened amid mounting economic concerns. The S&P 500 has slipped to its lowest level since before the 2016 U.S. presidential election, and small-cap stocks, represented by the Russell 2000—often a strong performer when rate cuts are anticipated—have fallen more than 6% year to date, underperforming the roughly flat S&P 500.
Investor nerves have been driven by a string of disappointing economic data. January registered the first decline in consumer spending in nearly two years and the largest monthly drop in retail sales in a year. At the same time, the housing market remains soft, and manufacturing and construction activity unexpectedly contracted, adding to concerns about the broader economic outlook.