U.S. Markets Rally on Economic Resilience Despite Reduced Rate-Cut Bets

Major U.S. stock indices staged a midday reversal on Thursday, climbing into positive territory after a stronger-than-expected GDP report forced investors to recalibrate their expectations for Federal Reserve interest rate cuts.

The Commerce Department's advance estimate showed the U.S. economy grew at an annualized rate of 2.9% in the fourth quarter, significantly surpassing economist forecasts of 2.0%. This display of economic resilience immediately tempered market bets on aggressive monetary policy easing from the Fed.

Market Dynamics and Sector Performance

Initially, futures pointed to a lower open as traders digested the implications of hot economic data. However, by late morning, the narrative shifted from 'bad news is good news' to a more traditional appreciation for fundamental strength.

  • The S&P 500 erased early losses to trade 0.4% higher, led by gains in technology and industrial sectors.
  • The Nasdaq Composite outperformed, rising 0.7% as mega-cap tech stocks found support.
  • The Dow Jones Industrial Average turned positive, up 0.3%, with Boeing and Caterpillar among notable gainers.

"The market is having a nuanced reaction," said Mark Johnson, chief market strategist at Horizon Investments. "While the GDP print reduces the urgency for rate cuts, it also confirms the economy isn't heading toward a hard landing. Investors are choosing to focus on the growth story rather than the implications for Fed policy."

Looking Ahead: The Final Data Point of 2025

With this major economic release now in the rearview mirror, traders are turning their attention to Friday's Personal Consumption Expenditures (PCE) price index—the Fed's preferred inflation gauge and the last significant data point of the year.

Analysts suggest that unless the PCE report shows a significant cooling, the Fed is likely to maintain its current stance well into the new year. According to CME Group's FedWatch Tool, the probability of a March rate cut fell from 55% to below 40% following the GDP release.

Meanwhile, the bond market reflected the shifting expectations, with the yield on the 10-year Treasury note rising 8 basis points to 4.15%. The U.S. dollar index strengthened against a basket of major currencies.