Markets experienced a sharp sell-off on Wednesday as Fed Chair Jerome Powell explained the central bank’s decision to cut interest rates at a slower pace next year than previously anticipated. The Fed now forecasts two rate cuts in 2025, down from the four anticipated in September. Investment strategists pointed to a shift in the Fed’s tone, causing uncertainty around the frequency and magnitude of future rate cuts in 2025.

A Hawkish Shift from the Fed

Michael Kantrowitz, Piper Sandler’s chief investment strategist, described the Fed’s "hawkish tone" as an "extrapolation" of recent market trends. The strategist sees the move as a “light pivot,” as quoted on Yahoo Finance. Since Donald Trump’s election victory, investor sentiment has been bullish, but Powell’s remarks served as a reality check, pointing to prevailing fears around higher rates and inflation.

A Resilient Bull Case for 2025

But investors’ fears are probably baseless. While Wednesday’s sell-off shook markets, some strategists suggested it was not a complete narrative shift. Nicholas Colas, co-founder of DataTrek Research, highlighted Powell’s positive economic outlook as a “healthy backdrop” for equities, as quoted on Yahoo Finance.

Fundamentals remained unchanged. Colas added that fewer rate cuts could reflect the positives like the U.S. economy’s ongoing growth and marginal inflation. Fed’s adjustments in projections include higher core inflation and economic growth alongside a lower unemployment rate for 2025 (read: Fed Cuts Rates by 0.25%, Signals Fewer Cuts: ETFs to Play).

Powell acknowledged that some officials are factoring policy ambiguity from the Trump administration into their forecasts. Meanwhile, Kevin Gordon, senior investment strategist at Charles Schwab also indicated that Powell’s optimistic outlook for the U.S. economy provides a positive foundation for stocks, even if the pace of rate cuts in 2025 upsets investors.

ETFs to Play

Against this backdrop, below we highlight a few exchange-traded funds (ETFs) that could help investors in this uncertain but still-optimistic scenario.

Invesco QQQ Income Advantage ETF (QQA Quick QuoteQQA - Free Report)

As the artificial intelligence (AI) boom is in fine fettle, exposure to the Nasdaq-100 ETF QQQ is desirable. But a low volatility quotient makes sense if rates rise next year. The QQA ETF offers that layer of protection from downside.

The Invesco QQQ Income Advantage ETF seeks to provide investors exposure to the Nasdaq-100 Index combined with an active option income overlay for income generation, downside protection and upside participation. The ETF QQA yields 3.29% annually.

NEOS Russell 2000 High Income ETF (IWMI Quick QuoteIWMI - Free Report)

As the U.S. economy has been growing at a steady clip, the small-cap ETF IWM appears to be a good bet. This is especially true given that Trump’s protectionist agenda favors small-cap ETF investing. The ETF IWMI seeks to generate high monthly income in a tax-efficient manner with the potential for small-cap equity appreciation. The ETF IWMI yields 7.15% annually.

NEOS S&P 500 High Income ETF (SPYI Quick QuoteSPYI - Free Report)

The NEOS S&P 500 High Income ETF seeks high monthly income in a tax efficient manner, with the potential for upside appreciation in rising markets. The ETF charges 68 bps in fees and yields 11.90% annually (read: How to Play Wall Street Stocks in 2025? ETF Strategies in Focus).

Invesco S&P 500 Equal Weight ETF (RSP Quick QuoteRSP - Free Report)

Optimistic economic outlook and a moderately dovish Fed should inspire investors to broaden their focus beyond the massive growth and technology stocks. Unlike the previous year's trend where investors clung to the 'Magnificent Seven' mega-caps for innovations and AI mania, the year 2025 may see a shift. Zacks Rank #2 (Buy) RSP is a good pick in this context.