US Stock Market's Global Dominance Fading?
U.S. stocks slumped Friday as worries flared again on Wall Street about tariffs and inflation.
The S&P 500 fell 0.9% and erased what had been a modest gain for the week. It’s one of the worse drops for the index so far in the young year, but it remains near its record set two weeks ago.
The Dow Jones Industrial Average sank 444 points, or 1%, and a sharp fall for Amazon after its latest profit report dragged the Nasdaq composite to a market-leading loss of 1.4%.
Treasury yields also climbed in the bond market after a discouraging report on Friday morning suggested sentiment is unexpectedly souring among U.S. consumers. The preliminary report from the University of Michigan said U.S. consumers are expecting inflation in the year ahead to hit 4.3%, the highest such forecast since 2023.
That’s a full percentage point above what consumers said they were expecting a month earlier, and it’s the second straight increase of an unusual amount. Economists pointed to the possibility of U.S. tariffs on a wide range of imported products, which President Donald Trump has proposed and could ultimately push up prices for U.S. consumers.
Trump said at a White House press conference Friday that he’s likely to have an announcement on Monday or Tuesday on “reciprocal tariffs, where a country pays so much or charges us so much, and we do the same.”
The consumer-sentiment data followed a mixed update on the U.S. job market, which is often each month’s most anticipated economic report. It showed hiring last month was less than half of December’s rate, but it also included encouraging nuggets for workers: The unemployment rate eased, and workers saw bigger gains in average wages than economists expected.
All the data taken together could keep the Federal Reserve on hold when it comes to interest rates. The Fed began cutting its main interest rate in September in order to relax the pressure on the economy and job market, but it warned at the end of the year that it may cut fewer times in 2025 than it earlier expected given worries about inflation staying stubbornly high.
Interest rates are one of the things Wall Street cares most about because lower rates can lead to higher prices for stocks and other investments. The downside is they can also give inflation more fuel.
For Scott Wren, senior global market strategist at Wells Fargo Investment Institute, the jobs report did nothing to change his forecast for the Fed to cut the federal funds rate just once in 2025. That’s a touch more conservative than many traders on Wall Street, who collectively see a 45% chance the Fed will cut at least twice, according to data from CME Group. Of course, some traders are also betting on the possibility for zero cuts.
Wren said financial markets could stay shaky in the near term, not only because of uncertainty about interest rates but also about Trump’s tariffs and other unknowns around the world.
After rocking financial markets at the start of this week, worries about a potentially punishing global trade war had eased a bit after Trump gave 30-day reprieves for tariffs on both Mexico and Canada.
In the meantime, stocks of big U.S. companies continue to swing as they report how much profit they made during the last three months of 2024. Most are reporting better results than expected, which is typical, but that’s not always enough.
Amazon, one of Wall Street’s most influential companies, topped analysts’ expectations for earnings at the end of 2024, but its stock nevertheless fell 4.1%. Investors focused instead on its forecast for upcoming revenue, which fell short of analysts’ expectations.
Homebuilders also tumbled to sharp losses as fewer cuts to interest rates by the Fed could help keep mortgage rates high. D.R. Horton fell 5%, and Lennar sank 4.2%.
On the winning side of Wall Street was Expedia Group, which leaped 17.3% after reporting better profit for the last three months of 2024 than analysts had forecast.
Expedia CEO Ariane Gorin said demand for travel during the latest quarter was stronger than expected, and the company is also bringing back its dividend for investors. It had suspended its payouts to shareholders in 2020 after the COVID-19 pandemic crushed the travel industry.
All told, the S&P 500 fell 57.58 points to 6,025.99. The Dow Jones Industrial Average dropped 444.23 to 44,303.40, and the Nasdaq composite sank 268.59 to 19,523.40.
In the bond market, the 10-year Treasury yield rose to 4.48% from 4.44% late Thursday. The two-year Treasury yield, which more closely tracks expectations for the Fed, rose more. It climbed to 4.28% from 4.22%.
A fear among economists is that when U.S. households expect inflation to be high in the future, they could begin buying things in advance and making other moves that can lead to a self-fulfilling cycle that worsens inflation. That could push the Fed to keep the federal funds rate higher than it otherwise would.
In stock markets abroad, indexes fell modestly across Europe after finishing mixed in Asia.
Sean Colon and Hakyung Kim of CNBC also report the Dow closes 400 points lower Friday as inflation and tariff fears spur a sell-off:
Stocks slid on Friday as a mix of news related to tariffs and inflation worried traders to close out the week.
Major benchmarks took a leg lower during the session after President Donald Trump said he was planning reciprocal tariffs on trading partners. This could mean raising tariff levels across the board to equal rates charged to the U.S.
The Dow Jones Industrial Average fell 444.23 points, or 0.99%, to close at 44,303.40. The S&P 500 declined 0.95% to 6,025.99, and the Nasdaq Composite slid 1.36% to end at 19,523.40. Friday’s losses left the major averages in negative territory on the week.
“I’ll be announcing that next week reciprocal trade, so that we’re treated evenly with other countries,” said Trump during a meeting with the visiting Japanese Prime Minister Shigeru Ishiba. “We’ll have a news conference, and we’ll lay it out pretty simple.”
The stock market was already on edge before the Trump comments as some earlier consumer sentiment and jobs data pointed to a pickup in inflation and spiked the 10-year Treasury yield above 4.5% at its session high.
Consumer sentiment fell in February to 67.8, according to a preliminary reading of the University of Michigan’s consumer sentiment index. Economists polled by Dow Jones had expected 71.3.
But perhaps more concerning was that the report’s respondents anticipate the one-year inflation rate to hit 4.3%, marking a rise of one percentage point from the previous month and its highest level since November 2023.
Also released on Friday, January’s jobs report showed the unemployment rate fell to 4% from 4.1% and that average hourly earnings last month were higher than expected.
Amazon lost 4% after guidance from the e-commerce giant disappointed investors. The company called for revenue growth of 5% to 9% in the first quarter, its weakest growth on record. The outlook overshadowed top- and bottom-line beats in the fourth quarter. Alphabet continued to fall following somewhat-disappointing results earlier in the week.
“We’ve just had some disappointments in the traditionally non-disappointing tech or ‘Magnificent Seven’ areas, and so I think we’re seeing some rotation away from those groups,” said Sam Stovall, chief investment strategist at CFRA Research. “I don’t think that we’re heading for a bear market but rather just probably heading for some volatility and short-term disappointment.”
It has been a volatile week. Stocks fell on Monday after President Donald Trump over the weekend announced 10% tariffs on China. He also proposed, then later paused, 25% levies on Canada and Mexico. The S&P 500 then gained for three straight days on the tariff reprieve before falling again on Friday.
And Julien Ponthus and Michael Msika of Bloomberg report BofA strategist Hartnett sees US stock market's global dominance fading:
Bank of America Corp. strategists expect US stock-market outperformance to continue to fade after a relentless run was halted in the early part of 2025.
Equity markets including Brazil, Germany, the UK, China and Canada have all yielded higher returns than Wall Street’s S&P 500 year to date, noted strategists including Michael Hartnett. That’s as the so-called Magnificent Seven technology firms fail to provide the impetus they have done for so long.
The BofA strategists also point to a fading narrative around a US economy that’s structurally outpowering its rivals, as well as investors betting on geopolitical stability in the Middle East and Ukraine.
They recommend being long Chinese equities as they’re not expecting an escalation of the trade-and-technology war with the US.
Hartnett’s team says that beyond Wall Street, stocks in most regions are “frontrunning peak US exceptionalism.” However, they warned investors may take profits on European shares following the German election in a few weeks’ time, and if peace talks between Russia and Ukraine begin this month or next.
On bonds, BofA expects Treasury yields to fall below 4% as President Donald Trump looks to tackle government spending and stop debt spiraling, while also seeking approval in Congress for his tax cuts.
Money market funds drew in $46.8 billion in the week through Feb. 5, with $16.6 billion going into bonds and $600 million leaving stock funds, BofA added, citing EPFR Global data.
Is the US stock market dominance fading? I doubt it but it's clear Mag-7 stocks minus Meta are losing their shine and earlier this week, I discussed why Nicolai Tangen, CEO of NBIM which manages Norway's giant sovereign wealth fund, thinks the tech rally won't last.
Still, it's worth noting despite the volatile start to the year, retail investors keep plowing into the market, pouring $3 billion into stocks on Monday.
Year-to-date sector performance shows a rotation going on in the stock market led by cyclical stocks like Financials, Energy, Industrials and Materials as Information technology remains the only sector in the red:
Again, this is all a call on rates and the economy. The first jobs report since President Donald Trump’s inauguration came out this morning, falling short of headline expectations in the weakest start to a year for overall job growth since before the COVID-19 pandemic, though other data points revealed a resilient labour market:January’s employment update:
- U.S. economy added 143,000 non-farm payrolls from December to January, on a seasonally adjusted basis.
- Economists expected 170,000 new jobs, according to consensus economist forecasts compiled by FactSet.
- But the unemployment rate was 4% last month, beating estimates of 4.1%, where it stood in December.
- And average hourly wages increased 4.1% year-over-year to a new record of $35.87, compared to forecasts calling for average hourly wages to increase by 3.8% to pay of $35.80.
- The government also reported 100,000 additional jobs added in November and December than previously shared.
Friday’s report provided evidence of slowing expansion. The 143,000 jobs added would be the weakest January total since 2016. January is the ninth consecutive month of at least 4% unemployment, after the U.S. spent all of Feb. 2022 to April 2024 below that mark.
“Aside from a slightly disappointing headline payrolls number, the broader picture is still one of labor market resilience and sustained wage pressures,” Seema Shah, Principal Asset Management’s chief global strategist, wrote in emailed comments.
Sustained wage pressures, higher inflation expectations in consumer sentiment data and a slowing US labour market are painting a picture of stagflation ahead.
That will be a challenging environment for the Fed to navigate.
Alright, before I wrap it up, have a look at this week's top-performing and worst-performing US large cap stocks (data can be found on barchart.com here):
Below, CNBC's Rick Santelli joins 'Squawk Box' to break down the January jobs report. There was someone on the pnael who said he expects big downward revisions to the second half data of last year (something worth keeping in mind).
Also, Tom Lee, Fundstrat, joins 'Closing Bell' to discuss the markets, biggest takeaways so far in 2025 and the 'Mag 7's' performance this year.
Third, Jason Furman, Fmr. Council of Economic Advisers chairman, joins 'Closing Bell Overtime' to talk the impact tariff uncertainty and inflation risk is having on the market.
Fourth, Richard Bernstein, Richard Bernstein Advisors CEO and CIO, joins 'The Exchange' to discuss Bernstein's thoughts on current equity market levels, the demand for AI, and much more.
Trivariate’s Adam Parker and Robinhood's Stephanie Guild, join 'Closing Bell' to discuss hyperscalers CapEx numbers and AI spending.
Lastly, CNBC’s Steve Liesman and Minneapolis Fed President Neel Kashkari joins 'Squawk Box' to discuss the Fed's inflation fight, state of the economy, inflation outlook, strength of the labor market, rate path outlook, and more.
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