Analysis of the Structural Impact of the Fed's Interest Rate Maintenance on U.S. Stock Valuations and Capital Flows in 2025

According to the latest market data, the CME FedWatch Tool shows that the probability of the Federal Reserve keeping interest rates unchanged in January 2025 is as high as 75.6%. This expectation is profoundly reshaping the valuation structure and capital allocation logic of the U.S. stock market.

The current market presents a significant valuation differentiation pattern:

• S&P 500 ETF (SPY):
  P/E ratio of 27.38x, in the historical high range [0]
• Nasdaq 100 ETF (QQQ):
  P/E ratio as high as 33.68x, reflecting the valuation premium of tech growth stocks [0]
• Dow Jones ETF (DIA):
  P/E ratio of 23.45x, relatively reasonable [0]
• Russell 2000 ETF (IWM):
  P/E ratio of 18.34x, small-cap valuations are more attractive [0]

In the high-interest-rate environment maintained, different sectors show significant differentiation:

• Utilities (+2.11%):
  Stable cash flow and dividend yields are favored [0]
• Basic Materials (+1.10%):
  Benefit from price support in an inflationary environment [0]
• Technology Sector (+0.83%):
  AI-driven fundamental improvements offset interest rate pressures [0]

• Energy Sector (-0.88%):
  High interest rates suppress demand and investment [0]
• Healthcare (-0.31%):
  Policy uncertainty increases valuation pressure [0]

Based on data analysis, the performance of various indices during the 2024-2025 period shows obvious differences:

Data shows that although the Nasdaq index has the highest return, its volatility and maximum drawdown are also the largest, reflecting the high-risk characteristics of growth stocks in a high-interest-rate environment.

According to the latest market trends [1]:

• Accelerated sector rotation:
  Investors are diversifying from over-concentrated large tech stocks to other sectors
• Increased international allocation:
  Attention to Asian markets and emerging markets is rising
• Mid-term growth stocks favored:
  TimesSquare Asset Management data shows that mid-cap growth stocks outperform the broader market

In the environment of maintaining high interest rates, traditional valuation methods face challenges:

• Discount rates remain at a high level, suppressing growth stock valuations
• Cash flow quality becomes a key evaluation criterion
• Earnings certainty is more important than growth rate

• The importance of P/B ratio increases
• Dividend yield becomes an important consideration
• Free cash flow yield gains attention

1. Strong cash flow generation capacity
2. Low capital expenditure requirements
3. Strong price transmission capability
4. Stable dividend policy

1. High reliance on capital expenditures
2. Long investment recovery cycle
3. High interest rate sensitivity
4. Unstable cash flow

Based on the current market environment, it is recommended to adopt:

• Value-oriented ETFs (e.g., DIA, IWM)
• High-dividend stock portfolios
• Defensive sector allocations

• Selected growth stocks (high-quality cash flow)
• Sub-sectors benefiting from policy themes
• International market exposure

1. Duration management:
   Control the portfolio’s sensitivity to interest rate changes
2. Quality screening:
   Focus on companies with high financial health
3. Diversified allocation:
   Avoid over-concentration in a single industry or style
4. Dynamic adjustment:
   Closely track policy changes and market expectations, adjust strategies in a timely manner

In the environment where the Federal Reserve maintains high interest rates:

• Increased market volatility:
  Policy uncertainty drives fluctuations
• Continued style rotation:
  The advantage of value over growth may continue
• Intensified individual stock differentiation:
  Fundamentals become more prominent

If the policy shifts to interest rate cuts:

• Rebound space for growth stocks:
  Interest rate-sensitive sectors are expected to recover
• Valuation re-rating opportunities:
  Market risk appetite improves
• Capital return risk:
  Funds that flowed out currently may return

The expectation that the Federal Reserve will keep interest rates unchanged with a 75.6% probability is profoundly reshaping the valuation structure and capital flows of the U.S. stock market in 2025. Investors need to:

1. Re-evaluate valuation frameworks:
   Adapt to the new normal in a high-interest-rate environment
2. Optimize asset allocation:
   Balance risk and return, focus on quality factors
3. Maintain flexibility:
   Closely monitor policy changes and adjust strategies promptly
4. Focus on structural opportunities:
   Seek undervalued high-quality targets amid differentiation

Although the current environment is full of challenges, it also provides buying opportunities for prudent investors. The key is to remain rational, follow value investment principles, and grasp long-term growth opportunities amid volatility.

[0] Gilin API Data - Real-time market data, technical indicators and statistical analysis
[1] Bitget - “Hawkish Rate Cuts and Balance Sheet Expansion Amid Growing Fed Divisions”
[2] Mitrade - “Fed Unexpectedly Releases Three Dovish Signals! Dow Surges Nearly 500 Points”
[3] Sina Finance - “Tech Stocks Slump as U.S. Stocks Begin Sector Rotation; How Will Year-End Market Perform?”
[4] CMoney - “U.S. Traditional Blue Chips and Growth Tech Shine Together: 2025 U.S. Stock Investment New Perspective Reveals Capital Flow Code”