Market Decline: Stocks Drop as Labor Market Strength Fuels Rate Hike Concerns
The S&P 500 Index ($SPX) (SPY) closed down -1.54% on Friday, while the Dow Jones Industrials Index ($DOWI) (DIA) fell -1.63%, and the Nasdaq 100 Index ($IUXX) (QQQ) dropped -1.57%. March E-mini S&P futures (ESH25) are currently down -1.57%, and March E-mini Nasdaq futures (NQH25) have decreased by -1.63%.
Stocks Plummet Amid Rising Bond Yields
Stocks suffered significant losses on Friday, with both the S&P 500 and the Dow hitting two-month lows, and the Nasdaq reaching a six-week low. A surge in global bond yields pressured stock prices. Notably, the US 10-year T-note yield climbed to a 14-month high, the German 10-year bund yield increased to a six-month high, and Japan’s 10-year JGB yield rose to a 13-year high.
Unexpected Labor Market Strength Raises Rate Cut Doubts
The market downturn was largely attributed to surprising strength in the U.S. labor market, which may diminish the likelihood of the Federal Reserve pausing its interest rate cuts. In December, nonfarm payrolls rose by +256,000, exceeding expectations of +165,000—marking the largest increase in nine months. The unemployment rate also unexpectedly fell -0.1% to 4.1%, showing a stronger labor market than anticipated, as no change was expected. While average hourly earnings eased to +3.9% year-over-year, this was still marginally lower than expectations of +4.0%.
Tech Stocks Suffer from Regulatory Concerns
Tech stocks, particularly in the chip sector, experienced notable declines after Bloomberg reported that the Biden administration is looking to restrict the sale of AI chips used in data centers. Major players like Nvidia (NVDA), ARM Holdings Plc (ARM), Analog Devices (ADI), and Intel (INTC) all fell by over -3%.
Consumer Sentiment and Inflation Expectations Weaken
Stock losses intensified following a University of Michigan report showing a drop in U.S. consumer sentiment and a rise in inflation expectations. The January consumer sentiment index fell -0.8 to 73.2, below the expected unchanged figure of 74.0. Additionally, the one-year inflation expectations climbed unexpectedly to +3.3%, reaching an eight-month high, while the five-to-ten-year inflation expectations jumped to +3.3%, a 16-year high.
Hawkish Fed Comments Impact Markets
Bearish sentiment around stocks and bonds was further fueled by hawkish comments from Federal Reserve officials. Governor Bowman noted that while inflation had declined significantly throughout 2023, core inflation remains above the Fed’s 2% target, suggesting a cautious approach to policy changes. Boston Fed President Collins indicated her support for fewer rate cuts moving forward due to unexpected uncertainties in the economic outlook.
Low Expectations for Future Rate Cuts
The markets are currently pricing in a 3% chance of a -25 basis point rate cut during the upcoming FOMC meeting on January 28-29.
Global Markets Follow Suit
Overseas, stock markets also ended lower. The Euro Stoxx 50 decreased by -0.81%, China’s Shanghai Composite Index fell to a two-and-a-half month low with a -1.33% drop, and Japan’s Nikkei Stock 225 slid to a two-week low at -1.05%.
Interest Rates on the Rise
March 10-year T-notes (ZNH25) closed down -26.5 ticks on Friday, with the yield increasing by +8.3 basis points to 4.772%. The recent stronger-than-expected payroll report has dampened the outlook for rate cuts, and rising inflation expectations have also weighed on T-note prices.
Chip Sector Declines Amid Regulatory Concerns
Chip-related stocks dropped further following the government’s reported intentions, with Nvidia (NVDA), ARM (ARM), Analog Devices (ADI), and Intel (INTC) posting losses of over -3%. Additional declines were seen in Applied Materials (AMAT), Marvell Technology (MRVL), Microchip Technology (MCHP), and Lam Research (LRCX), all down more than -2%.
Corporate Earnings Impact Stock Performance
Constellation Brands (STZ) led the S&P 500 losers with a fall of more than -17% after reporting weaker-than-expected Q3 sales of $2.46 billion and a forecast for FY comparable EPS of $13.40-$13.80. ON Semiconductor (ON) dropped over -7% after a downgrade by Truist Securities. Advanced Micro Devices (AMD) fell by over -4% following a downgrade by Goldman Sachs.
Insurance and Utility Stocks Drop
Insurance stocks retreated amid the rising costs of damage from California wildfires. Allstate (ALL) fell more than -5%, and Travelers Cos (TRV) dropped over -4%. Utility stocks such as PG&E Corp (PCG), Edison International (EIX), and Sempra (SRE) closed down significantly due to wildfire risks.
Gainers Amidst the Decline
In contrast, Walgreens Boots Alliance (WBA) soared by over +27% after reporting Q1 sales of $39.46 billion, exceeding expectations. Delta Air Lines (DAL) rose more than +8% on better-than-expected Q4 earnings, improving forecasts for Q1. Across the airline sector, American Airlines Group (AAL), United Airlines Holdings (UAL), and Alaska Air Group (ALK) also reported gains.
Market Commentary on Earnings
Energy stocks gained momentum as WTI crude oil prices rose by over +3% to reach a three-month high, lifting Coterra Energy (CTRA), Devon Energy (DVN), and Diamondback Energy (FANG) by more than +2% each. Royalty Pharma Plc (RPRX) experienced notable growth, up more than +12% after announcing a $3 billion share buyback plan.
Earnings Reports on the Horizon
Earnings Reports (1/13/2025): Aehr Test Systems (AEHR), BARK Inc (BARK), Dakota Gold Corp (DC), Immersion Corp (IMMR), KB Home (KBH), Unity Bancorp Inc (UNTY).
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.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
