By Medha Singh and Purvi Agarwal
(Reuters) - Wall Street's main indexes regained some ground on Thursday, a day after the Federal Reserve's projections of fewer-than-expected interest rate cuts and higher inflation next year wrong-footed some investors and pummeled U.S. stocks.
The Fed on Wednesday said it expects to make just two 25 basis point cuts in 2025, half a percentage point less than its September forecast and raised inflation expectations for the first year of the new Trump administration, sending the three main U.S. stock indexes to their sharpest daily declines since August.
Traders now see just one quarter-point rate reduction by mid-2025, and see less than two cuts in total by the end of the year, compared with last week's expectations of three rate cuts.
At 9:44 a.m. ET the Dow Jones Industrial Average rose 395.85 points, or 0.94%, to 42,722.72, the S&P 500 gained 52.72 points, or 0.90%, to 5,924.80 and the Nasdaq Composite gained 176.89 points, or 0.91%, to 19,569.58.
The CBOE volatility index, Wall Street's fear gauge, eased to 20.56 points from a four-month high of 28.32 a day earlier, while the small-cap Russell 2000 was up 1.3%.
Most megacap and growth stocks recovered some ground, with Tesla (NASDAQ:TSLA) and Alphabet (NASDAQ:GOOGL) in the lead, gaining 2% and 1.7% respectively.
"The market tends to 'pop after a drop' but I wouldn't be surprised if we end up giving back much of the gains towards the end of the day because investors don't want to be over exposed over the weekend," said Sam Stovall, chief investment strategist of CFRA Research.
The benchmark S&P 500 had hit a near one-month low on Wednesday as investors adjusted their risk exposure to reflect the impact of higher borrowing costs in 2025. The Dow is on track to snap its ten-session losing streak, its longest since 1974.
The hawkish shift from the Fed comes just three months after the U.S. central bank began its monetary easing cycle with a larger-than-usual 50 basis point interest rate cut that spurred risk appetite and helped push Wall Street to record levels.
"If the Fed stays elevated for a while then that could put inflation back on a downward track and could allow for a positive year (for markets)," said Stovall.
Meanwhile, data showed the U.S. economy grew faster than previously estimated in the third quarter, while weekly jobless claims fell more than expected last week, consistent with a gradual cooling in labor market conditions.
Micron (NASDAQ:MU) slumped 17% after its forecast of quarterly revenue and profit below estimates.
Accenture (NYSE:ACN) gained nearly 7.2% as the IT services provider beat Wall Street estimates for first-quarter revenue, while homebuilder Lennar (NYSE:LEN) shed 4.5% after reporting fourth-quarter results below estimates.
Vertex Pharmaceuticals (NASDAQ:VRTX) tumbled 10.2% after the company said its experimental non-opioid drug showed little difference versus a placebo in reducing pain in a mid-stage study.
Advancing issues outnumbered decliners by a 2.77-to-1 ratio on the NYSE and by a 2.61-to-1 ratio on the Nasdaq.
The S&P 500 posted two new 52-week highs and 18 new lows, while the Nasdaq Composite recorded 11 new highs and 66 new lows.