(Bloomberg) — A renewed wave of dip buying drove stocks well off session lows, following a selloff triggered by a massive recalibration of Federal Reserve rate wagers.
About 350 companies in the S&P 500 advanced, with the gauge trimming most of a slide that approached 1% earlier Monday. Energy producers joined a rally in oil while banks rose ahead of the start of the earnings season. Yet losses in big tech engulfed powerhouses like Nvidia Corp. and Apple Inc. — while preventing a bigger rebound in the US equity benchmark. Bonds stabilized after a rout that saw traders scaling back bets on policy easing amid fears of stubborn price pressures.
“While even cooler-than-expected inflation data this week won’t nudge the Fed into another rate cut this month, it may help ease some of the bearish momentum, as could a solid start to earnings season,” said Chris Larkin at E*Trade from Morgan Stanley.
To Callie Cox at Ritholtz Wealth Management, while analysts have been slashing earnings expectations “like mad,” the degree of cuts has been unusual, and the reports over the next few weeks could help stabilize the market.
“If anything, earnings are a reminder of how we got here,” she said. “It’s so important to remember how encouraging the story is for the economy right now. High expectations have caused us to stumble, but this dip could entice a lot of buyers simply because the foundation is strong.”
The S&P 500 fell 0.1%. The Nasdaq 100 dropped 0.6%. The Dow Jones Industrial Average rose 0.6%. A Bloomberg gauge of the “Magnificent Seven” megacaps slid 1%. The Russell 2000 index of smaller firms retreated 0.5%.
The yield on 10-year Treasuries advanced one basis point to 4.77%. The Bloomberg Dollar Spot Index wavered. The Bank of England successfully sold £750 million ($911 million) of gilts despite recent market turmoi. Oil rallied to the highest level in five months.
Underlying US inflation probably cooled only a touch at the close of 2024 against a backdrop of a resilient job market and steadfast economy, supporting the Fed’s go-slow approach to further rate cuts.
The consumer price index excluding food and energy is seen rising 0.2% in December after four straight months of 0.3% increases, according to the median projection in a Bloomberg survey of economists. The core CPI, a better snapshot of underlying inflation, is forecast to have risen 3.3% from a year earlier — matching readings from the prior three months.
“The post-data reaction has left Treasuries oversold,” said Will Compernolle at FHN Financial. “Bond market pricing reflects too much investor confidence in labor market strength and an overly pessimistic inflation outlook. There may be nothing today or tomorrow on the calendar that will snap bond yields out of their upward drift, but a 0.2% increase in the core CPI on Wednesday, as the consensus expects, would give a bond-bullish jolt to the prevailing market sentiment.”
The equity market has seen more pronounced reactions to macroeconomic news since late 2024, with the S&P 500 swinging at least 1% in either direction in 8 of the last 15 trading sessions since the Fed’s latest rate decision Dec. 18.
Sentiment around equities is being explained by bond yields more than any point in the past 30 years, according to Michael Kantrowitz, chief investment strategist at Piper Sandler & Co. Market weakness will more likely come from higher rates rather than softer growth, he says, a dynamic that begin in 2022 during the biggest paradigm shift for stocks since the 2007 peak in value over growth.
A hawkish surprise from US data this week including on inflation and retail sales could present a buying opportunity for risk assets, according to HSBC strategists. The team led by Max Kettner says their sentiment and positioning indicators are already flashing a mild buy signal.
“Some bad news would be good news right now,” the strategists wrote.
This year’s sharp decline in funding spread suggests that institutional investors’ positioning in equities is shifting as markets rethink the Fed’s interest-rate path, according to strategists at Goldman Sachs Group Inc.
The funding spread — a measure of demand for long exposure through equity derivatives such as swaps, options and futures — has tumbled to around 70 basis points from about 130 basis points in late December, they said.
“In our experience, large short-term moves in funding almost always mean that there has been a change in demand trends from professional investors,” the team led by John Marshall wrote in a note to clients. “We believe that pension funds, asset managers, hedge funds and CTAs have all been net sellers over the past few weeks.”
Positioning from systematic funds remains elevated in the 90th percentile and could be scaled back if high volatility persists, Deutsche Bank strategists including Parag Thatte said.
“Wall Street seems to have ‘gone fishing’ ahead of earnings season, as stocks pull back from December highs,” said Craig W. Johnson at Piper Sandler. “Despite the deterioration of breadth and sentiment, the primary uptrends for the major market indices remain intact. Wait for a deeper pullback to add to positions.”
UBS strategists says correlation among S&P 500 stocks may increase if tech earnings growth weakens, as the rest of the market is already seeing downgrades.
Strategists including Gerry Fowler and Max Grinacoff reiterate view that “a break in the AI tailwind could drive earnings convergence.”
“While the Fed’s path for cutting rates will be slower in 2025 given the recent strong job data and this has caused agita for tech stocks and risk-on assets, our bullish thesis for tech stocks in 2025 is well-intact and unchanged,” according to Daniel Ives at Wedbush.
He views these pullbacks “as golden buying opportunities to own the winners in the AI Revolution as more IT budget dollars heads towards this technology wave.”
Earnings season kicks into full gear this week with reports from the financial sector. Banks including JPMorgan Chase & Co. and Wells Fargo & Co. are expected to show continued gains from trading and investment banking, which helped offset net interest income declines caused by higher deposits and sluggish loan demand.
Lenders will also be quizzed about the 2025 outlook, as the Federal Reserve has signaled fewer rate cuts this year, which could stunt future profit growth.
“Bank earnings are always an effective way to get a pulse on the economy and the consumer, especially as it relates to credit usage and repayment,” said Michael Landsberg at Landsberg Bennett Private Wealth Management. “The big banks often give us a good insight into what we can expect to see from the more consumer oriented companies, which report earnings later on in earnings season. If credit card usage is up, that typically bodes well for companies that sell directly to consumers.”
Corporate Highlights:
Apple Inc.’s iPhone sales declined about 5% globally in the final quarter of last year, hurt by underwhelming upgrades and competitors making inroads in China.
The White House unveiled sweeping new limits on the sale of advanced AI chips by Nvidia Corp. and its peers, leaving the Trump administration to decide how and whether to implement curbs that have encountered fierce industry opposition.
Tesla Inc. surpassed one of Germany’s most prized premium car brands last year, despite selling fewer vehicles than expected.
Macy’s Inc. issued a downbeat outlook for sales in the current quarter, a sign that executives might have been too optimistic about their expectations for a solid holiday shopping season.
Lululemon Athletica Inc. expects fourth-quarter sales to surpass the market’s expectations, showing the upscale activewear brand is fending off upstart competitors and slower growth in consumer spending.
Abercrombie & Fitch Co. raised its fourth-quarter sales outlook on better-than-expected holiday sales, but the increase wasn’t enough to reassure investors the retailer could keep up the fast pace of growth.
Shake Shack Inc. reported fourth-quarter sales that surpassed expectations, signaling that efforts to raise its profile and serve customers faster are paying off.
Health insurance companies selling private Medicare Advantage plans in the US would see a greater increase in payments in 2026 than in the current year if a proposal released Friday is adopted by the incoming Trump administration.
Moderna Inc. slashed its sales forecast for this year as it struggles with slow demand for its Covid and RSV vaccines.
Johnson & Johnson agreed to acquire Intra-Cellular Therapies Inc., a company focused on treatments for central nervous system disorders, for about $14.6 billion.
Sonos Inc. Chief Executive Officer Patrick Spence is leaving after eight years in the job, a move that follows a botched app revamp that upset customers and stymied growth.
Eli Lilly & Co. will pay as much as $2.5 billion in cash to acquire a cancer drug that Scorpion Therapeutics Inc. is testing in early and mid-stage trials.
MicroStrategy Inc. bought $243 million of Bitcoin, the 10th consecutive weekly purchase by the enterprise software company turned leveraged Bitcoin proxy.
Shares of Sage Therapeutics Inc. surged after Biogen Inc. offered to acquire the neuroscience-focused drugmaker for about $469 million.
Key events this week:
US PPI, Tuesday
Fed’s John Williams and Jeffrey Schmid speak, Tuesday
Eurozone industrial production, Wednesday
Citigroup, JPMorgan, Goldman Sachs, Bank of New York Mellon, Wells Fargo and BlackRock earnings, Wednesday
US CPI, Empire manufacturing, Wednesday
Fed’s John Williams, Tom Barkin, Austan Goolsbee and Neel Kashkari speak, Wednesday
TSMC earnings, Thursday
ECB releases account of December policy meeting, Thursday
Bank of America, Morgan Stanley earnings, Thursday
US initial jobless claims, retail sales, import prices, Thursday
China GDP, property prices, retail sales, industrial production, Friday
Eurozone CPI, Friday
US housing starts, industrial production, Friday
Some of the main moves in markets:
Stocks
The S&P 500 fell 0.1% as of 1:30 p.m. New York time
The Nasdaq 100 fell 0.6%
The Dow Jones Industrial Average rose 0.6%
The MSCI World Index fell 0.3%
Bloomberg Magnificent 7 Total Return Index fell 1%
The Russell 2000 Index fell 0.5%
Currencies
The Bloomberg Dollar Spot Index was little changed
The euro fell 0.3% to $1.0216
The British pound fell 0.3% to $1.2176
The Japanese yen rose 0.1% to 157.50 per dollar
Cryptocurrencies
Bitcoin fell 2.7% to $91,763.1
Ether fell 8.4% to $2,989.99
Bonds
The yield on 10-year Treasuries advanced two basis points to 4.78%
Germany’s 10-year yield advanced two basis points to 2.61%
Britain’s 10-year yield advanced five basis points to 4.88%
Commodities
West Texas Intermediate crude rose 3.3% to $79.09 a barrel
Spot gold fell 1.1% to $2,660.83 an ounce
This story was produced with the assistance of Bloomberg Automation.
–With assistance from Sujata Rao, Margaryta Kirakosian, Catherine Bosley and Isabelle Lee.
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