On Wednesday, the Fed cut interest rates by 25 basis points to a range of 3.75%-4%, as expected, although prospects for the trajectory of borrowing costs in the near term remain murky due to a lack of new economic data during the ongoing federal government shutdown.

Separately, policymakers also announced an end to the December 1 reduction in Treasury bonds and mortgage-backed securities, a process known as quantitative tightening.

After rapidly expanding the size of its balance sheet to support markets and the economy during the COVID-19 pandemic, the Fed has been reducing its assets for most of the past three years. Having peaked at almost $9 trillion in 2022, the balance sheet has now shrunk to about $6.6 trillion.

However, this reduction threatened to drain a significant portion of the liquidity needed to keep the financial market running. The impact of this dynamic became apparent in the short-term money markets this month, as banks and other participants searched for more cash than was available for lending. As a result, one-day interest rates rose, at some point exceeding the Fed's target range.

"The end of quantitative tightening in December may have a more significant impact on the direction of the market in the medium term," Wolfe analysts including Chris Seneca and Adam Kalingasan wrote in a note on Thursday. "The Fed's decision to stop reducing Treasury securities indicates a change in the liquidity picture in the coming months, with a potential reduction in reserves."

They added that this trend could "negatively affect" sentiment, although it could be followed by a "gradual expansion as asset purchases are implemented again to match the growth of the banking system."

While fluctuations in reserves are expected to affect markets, the "key question" revolves around whether stocks will trade due to liquidity concerns or ongoing expectations of ultra-high corporate spending on artificial intelligence, analysts say.

"We believe in the latter in the short term."