US Stock Rally Stalls As Waller Remarks Boost Bonds: Markets Wrap

The yield on 10-year Treasuries fell four basis points to 4.61% as the stock market struggled to maintain momentum after a previous strong rally. This stall was influenced by dovish comments from Federal Reserve Governor Christopher Waller.

Market participants were also attentive to remarks from Treasury secretary nominee Scott Bessent, who indicated that the US could face an economic crisis if the Republican tax cuts from 2017 are not extended. Following a nearly 2% rise in the S&P 500, equities managed only minor declines, hindered notably by a drop in major tech stocks. Established earnings reports from Morgan Stanley and Bank of America Corp. failed to lift the overall market.

Jose Torres from Interactive Brokers noted, “Investors are hitting the pause button following yesterday’s momentous rally.” The bond market saw a rise as Waller suggested on CNBC that the Fed could consider lowering rates in the first half of 2025 provided inflation data remains favorable. He did not dismiss the possibility of a rate cut as early as March, prompting swap trading markets to reflect a slight increase in expected easing this year.

The US dollar remained near two-year highs during this period. Bessent emphasized the importance of maintaining the dollar as the world's reserve currency. When discussing potential inflationary effects of policies put forth by President-elect Donald Trump, he expressed belief that these policies could help bring inflation closer to the Fed's target.

The S&P 500 saw a decline of 0.2%, while the Nasdaq 100 dropped by 0.7%. The Dow Jones Industrial Average also fell by 0.2%. A measure of the top tech stocks, referred to as the "Magnificent Seven," experienced a larger decline of 1.9%. In contrast, the Russell 2000 index gained 0.2%, and the KBW Bank Index retreated by 0.2%.

Despite the lack of strength in the equity market, some traders pointed to a recent sentiment survey from the American Association of Individual Investors, suggesting a possible buying opportunity. The survey revealed bullish sentiment had decreased to 25.4%, which is below the historical average of 37.5% for the third time in seven weeks.

“Extremes in sentiment indicators can be reliable contrarian signals,” noted Larry Tentarelli from Blue Chip Daily Trend Report. He explained that investors usually feel most optimistic at market peaks and more pessimistic at lows.

Bank of America indicated potential surprises for the coming year, highlighting that a third consecutive year of significant gains in US stocks is not impossible, even if challenging. The firm backs this notion with expectations for the S&P 500 following its notable increases of 24% in 2023 and 23% in 2024, despite concerns about high valuations and uncertainties in fiscal and monetary policy.

As economic data was mixed on Thursday, US homebuilders expressed less optimism regarding sales, while retail sales data indicated solid performance during the holiday season. David Lefkowitz from UBS Global Wealth Management remarked that the upcoming fourth-quarter earnings season might redirect focus from macroeconomic to company-specific data, continuing to maintain a positive outlook for US equities.

Despite robust corporate earnings, analysts, including Helen Jewell from BlackRock Inc., believe a sustained equity market rally is unlikely. Jewell cautioned that the stock outlook appears fragile, citing worries about economic growth and inflation. “It’s going to be a rocky reporting season,” she remarked, noting particular concern about how the market reacts to earnings beats versus misses.

Meanwhile, investors have been increasing their holdings in large technology stocks, with data revealing they have reached the highest level of exposure since July. Hedge funds are also returning to megacap stocks after a period of reduced buying in 2024.

Corporate Earnings Highlights

• Morgan Stanley reported fourth-quarter profits that more than doubled, driven by strong trading revenues linked to US election volatility.

• Bank of America Corp. exceeded fourth-quarter profit expectations as investment banking fees soared to a three-year high alongside solid net interest income.

• PNC Financial Services Group Inc. and U.S. Bancorp anticipated muted net interest income growth for the first quarter due to uncertainties surrounding reduced interest rates and lending demands.

• Microsoft Corp. is increasing the price of its Office app bundle for consumers, banking on subscribers' willingness to pay more for new AI features.

• UnitedHealth Group Inc. faced ongoing elevated medical costs, causing revenue to fall short of expectations.

• Target Corp. raised its sales forecast following a strong holiday season, but investor concerns regarding profitability persist.

• American Express Co. agreed to pay approximately $230 million to settle a long-running investigation concerning its misleading sales practices affecting small business owners.

• Rio Tinto Group and Glencore Plc are reportedly in discussions to potentially merge, which could yield the largest deal in mining history.

• Reliance Industries Ltd. delivered slightly better-than-expected quarterly profits, benefiting from its telecom and retail segments amid volatility in petrochemicals.

• Taiwan Semiconductor Manufacturing Co. projected higher quarterly sales and capital expenditure ahead of analyst predictions, signifying robust investment in AI hardware through 2025.

Upcoming Economic Events

• China's GDP, property prices, retail sales, and industrial production reports are due on Friday.

• Eurozone's Consumer Price Index is expected on Friday.

• US housing starts and industrial production data are set to be released on Friday.

Here are some key market movements:

Market Overview

Stocks

• The S&P 500 dropped 0.2% by 4 p.m. New York time.

• The Nasdaq 100 fell 0.7%.

• The Dow Jones Industrial Average decreased by 0.2%.

• The MSCI World Index remained stable.

• The Bloomberg Magnificent 7 Total Return Index declined by 1.9%.

• The Russell 2000 Index edged up by 0.2%.

• The KBW Bank Index fell by 0.2%.

Currencies

• The Bloomberg Dollar Spot Index rose 0.1%.

• The euro remained steady at $1.0298.

• The British pound dipped 0.1% to $1.2229.

• The Japanese yen gained 0.8% to 155.22 against the dollar.

Cryptocurrencies

• Bitcoin increased by 0.6% to $100,262.36.

• Ether dropped 3% to $3,329.5.

Bonds

• The yield on 10-year Treasuries fell four basis points to 4.61%.

• Germany’s 10-year yield decreased by one basis point to 2.55%.

• In the UK, the 10-year yield dropped by five basis points to 4.68%.

Commodities

• West Texas Intermediate crude oil dropped by 1.7% to $78.66 per barrel.

• Spot gold increased by 0.7% to $2,714.48 per ounce.

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