(Bloomberg) — US stocks are set for a partial recovery on Thursday, suggesting the selloff after the Federal Reserve’s hawkish pivot was overdone. The yen slid as the Bank of Japan left borrowing costs unchanged.

Most Read from Bloomberg

Futures contracts for the S&P 500 (^GSPC) advanced 0.4% following the US benchmark’s biggest lost for a scheduled Fed decision day since 2001. Nasdaq 100 (NQ=F) contracts rose 0.3%. Key gauges in Europe and Asia retreated as equity markets caught up with post-Fed moves in the US.

The Fed scaled back the number of cuts it sees in 2025 to two as Chair Jerome Powell said future easing would require fresh progress on inflation. The reaction interrupted this year’s stellar rally in US stocks, with S&P 500 still on course to notch more than 20% of gains due to optimism about artificial intelligence and the outlook for the economy under a Donald Trump administration.

While the severity of Wednesday’ reaction showed that equity markets were less prepared for the Fed’s announcement, the shift implied that profits could be stronger than anticipated in the near term, said Florian Ielpo, head of macro research at Lombard Odier Investment Managers.

“What we have seen is a little cold water poured on what is otherwise a decent economy,” John Bilton, JPMorgan Asset Management’s head of global multi-asset strategy, told Bloomberg TV. “I am constructive about next year. If I’m a bull, I have got to love a healthy pullback.”

Money markets are pricing in fewer than two quarter-point reductions for the entirety of 2025, even less than what was implied in the Fed’s so-called dot plot on Wednesday. In the options market linked to the Secured Overnight Financing Rate, one large block trade placed Wednesday afternoon even stands to benefit from the start of another hiking cycle next year.

A Bloomberg dollar index steadied on Thursday after rising to the highest since 2022 following the Fed meeting. Long-duration US Treasuries extended losses, with 10-year yields rising 2 basis points to 4.53%, the highest since May.

“Everyone has wanted to cheer on stronger growth and the positives about the Trump agenda” Mark Dowding, chief investment officer at RBC Bluebay Asset Management, told Bloomberg TV. “The flip side to that, is if we’re in a world where rates are staying high for longer, then this is clearly more problematic for long-duration assets.”

European government bonds tumbled, catching up with the selloff in US Treasuries. The yield on UK 10-year notes jumped as much as nine basis points to 4.65%, the highest levels since October 2023, before the Bank of England sets policy later today.

Story Continues