Market Response to Tariff Announcement: Mixed Signals in U.S. Stocks
The S&P 500 Index ($SPX) (SPY) closed down -0.76% on Monday, while the Dow Jones Industrials Index ($DOWI) (DIA) fell -0.28%. The Nasdaq 100 Index ($IUXX) (QQQ) experienced a -0.84% decline as well. March E-mini S&P futures (ESH25) decreased by -0.72%, and March E-mini Nasdaq futures (NQH25) dropped by -0.76%.
Tariff Announcement Influences Markets
U.S. stock indexes closed lower on Monday, hitting multi-week lows. The declines followed President Trump’s announcement over the weekend that he would impose 25% tariffs on Canada and Mexico, and 10% tariffs on China. He also indicated that tariffs on European goods could be forthcoming. Scheduled to go into effect on Tuesday, these tariffs heighten fears of a potential trade war that could undermine global economic growth. Goldman Sachs suggested a risk of a 5% decline in U.S. stocks due to the negative impact on corporate earnings, while RBC Capital Markets projected drops between 5% and 10%.
Market Recovery Amid Positive Data
Despite these concerns, stocks rebounded somewhat after Mexican President Sheinbaum announced that the U.S. would delay tariffs on Mexico for one month. Additionally, better-than-expected U.S. ISM manufacturing and construction spending reports offered some support for the market.
The January ISM manufacturing index rose by +1.7 to 50.9, surpassing expectations of 50.0 and marking the highest level in over two years. Similarly, December construction spending increased by +0.5% month-on-month, exceeding forecasts of +0.2%.
Mixed Fed Signals
Comments from Federal Reserve officials presented a mixed picture. Atlanta Fed President Bostic indicated he wishes to hold off on further interest rate cuts, citing uncertainty about the economy’s direction in 2025. In contrast, Boston Fed President Collins stated that the Fed likely won’t respond to tariff impacts unless there are signs of sustained inflation.
Upcoming Earnings Reports
As earnings season is underway, major tech firms such as Alphabet and Advanced Micro Devices are scheduled to report on Tuesday. Qualcomm will publish its earnings on Wednesday, while Amazon.com will follow on Thursday. Analysts from Bloomberg Intelligence predict that S&P 500 earnings will increase by +7.5% year-on-year in Q4, representing the second-highest pre-season forecast in three years.
Market Outlook and Global Indices
The markets are currently pricing in a 14% chance of a -25 basis point rate cut at the next Federal Open Market Committee meeting on March 18-19. Internationally, stock markets closed lower on Monday. The Euro Stoxx 50 dropped to a 1-week low, down -1.30%, while Japan’s Nikkei Stock 225 fell to a 2-week low, down -2.66%. China’s Shanghai Composite Index remained closed for the Lunar New Year holiday.
Interest Rates and Bond Market Movement
March 10-year T-notes (ZNH25) rose +3.5 ticks, with yields falling -0.4 basis points to 4.543%. This increase was buoyed by strength in European government bonds and demand for safe-haven assets due to stock market selloffs and concerns over economic growth stemming from tariff implications. However, inflationary expectations linked to the tariffs weighed on T-note prices, especially following stronger-than-expected ISM manufacturing and construction data that appeared hawkish for the Fed.
European Economic Indicators
In Europe, government bond yields dropped on Monday. The 10-year German bund yield finished at 2.385%, down -7.4 basis points, reaching a 1-month low. The 10-year UK gilt yield also saw a decline, finishing at 4.487%, down -5.1 basis points.
The Eurozone’s January CPI surged +2.5% year-on-year, surpassing the +2.4% expected. Core CPI followed with a +2.7% increase, exceeding the +2.6% projected. Additionally, the Eurozone’s January manufacturing PMI was revised upward to an 8-month high of 46.6.
ECB Governing Council member Simkus indicated that the bank may adopt a looser policy moving forward, potentially cutting borrowing costs beyond the March meeting. Swaps now predict a 100% chance of a -25 basis point rate cut by the ECB at the March 6 policy session.
Stock Movements Influenced by Tariff Concerns
Companies involved in manufacturing or reliant on imports from China faced significant losses due to tariff announcements. Apple (AAPL) led the Dow Jones Industrials by closing down more than -3%. Dell Technologies (DELL) also fell by over -2%.
In the Nasdaq 100, PDD Holdings (PDD) dropped more than -5% as stocks exposed to China declined. Automakers, particularly Tesla (TSLA), saw declines after tariffs on U.S. imports from Canada, Mexico, and China became clear— Tesla fell over -5%, while General Motors (GM) and Ford Motor (F) also struggled.
Additionally, Moderna (MRNA) fell more than -7% amid fears surrounding potential leadership changes in health policy. FedEx (FDX) also faced a downward trend, closing down more than -6% after Loop Capital Markets reduced its stock rating.
In asset management, Blackrock (BLK), Invesco Ltd (IVZ), and State Street (STT) each closed down by more than -5%, -4%, and -3% respectively, reacting to fee cuts announced by Vanguard Group.
Sector-Specific Insights
Homebuilding stocks came under pressure due to worries about how tariffs could affect consumer confidence and construction costs. Major players like PulteGroup (PHM) and Lennar (LEN) fell over -3%, with both DR Horton (DHI) and Toll Brothers (TOL) seeing more than -1% declines.
On the other hand, Triumph Group (TGI) saw a remarkable increase of over +35% following a buyout from Warburg Pincus and Berkshire Hathaway at $26 per share. In healthcare, IDEXX Laboratories (IDXX) gained more than +11%, leading the S&P 500 and Nasdaq 100 after strong earnings results.
Other notable gainers included defensive healthcare stocks that rose as the broader market suffered. Molina Healthcare (MOH) was up more than +4%, with Elevance Health (ELV) gaining more than +2%.
Tyson Foods (TSN) also reported a strong quarterly EPS and saw its stock rise by more than +2%. Overall, significant fluctuations were noted across various sectors as the market navigated the implications of tariff announcements and positive economic data.
Earnings Reports Scheduled for 2/4/2025:
Companies reporting include: Advanced Micro Devices Inc (AMD), Alphabet Inc (GOOGL), Amcor PLC (AMCR), and many others.
On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
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