The rally in U.S. stocks stalled last week on mixed earnings reports and rising bond yields ahead of the Federal Open Market Operations (FOMC) meeting next week.
The S&P 500 ended Dec. 13 at 6,051, down 0.64 percent for the week; the Dow Jones was down by 1.82 percent; the Nasdaq managed to close with a gain of 0.34 percent; and the small-cap Russell 2000 lost 2.58 percent to end at 2,346.
U.S. stocks began the week under pressure as Nvidia’s shares headed south on news that China has opened an anti-monopoly probe on the tech giant’s business. This news added to the investor anxiety over the growing tensions between the United States and China and their impact on the top and bottom lines of U.S. companies with a significant presence in the world’s second-largest economy.
Then came a disappointing earnings report from Oracle after the market closed, cooling off investor enthusiasm about the ability of tech giants to monetize AI technologies and reach new highs on Wall Street.
Another headwind for stocks was a couple of economic reports showing that inflation remains elevated. The consumer price index, a measure of the cost of living, rose at an annual 2.7 percent in November, up from 2.6 percent in October and 2.4 percent in September, the second increase in inflation in seven months.
The core consumer price inflation rate in the United States, which excludes volatile food and energy prices from the calculation, remained at a three-month high of 3.3 percent in November.
Meanwhile, the Producer Price Index, which measures inflation at the wholesale level, rose to an annual rate of 3 percent in November, up from 2.4 percent in October, and an upwardly revised 1.9 percent in September.
“For several months earlier in the year, inflation was coming in better than expected,” Julia Pollak, ZipRecruiter chief economist, told The Epoch Times in an email. “But that is no longer the case. Inflation has recently firmed and become uncomfortably sticky, even as the labor market has continued to cool down and slacken.”
The firming inflation complicates the Fed’s role in shaping monetary policy at its next regular meeting next week.
“The labor market continues to scream for a rate cut, but inflation no longer appears to be sustainably moving towards the Fed’s 2 percent target, which Chair Jerome Powell has long told us is the condition for continued cuts,” Pollak said.
“While markets are still pricing in an 85 percent chance of a cut at the next meeting, that is probably optimistic. The chance of cuts at the next few meetings is growing slimmer with each CPI and PCE inflation report.”
The inflation numbers sent bond prices lower and yields higher. The benchmark 10-year U.S. Treasury bond yield ended the week at 4.40 percent, up from 4.11 percent the previous week.
Rising bond yields make stocks less appealing as bonds compete against stocks for investor dollars. They also help drive long-term interest rates higher, hurting economically sensitive market sectors such as consumer durables and homebuilders. Thus, a sizable decline was seen in the shares of these sectors during the week.
Matters could have been worse this week for Wall Street’s equity bulls if it hadn’t been for strong earnings and an upbeat guidance from Broadcom at the end of the week, which helped Nasdaq close with slight gains.
Skyler Weinand, chief investment officer of Regan Capital, doesn’t see stocks getting any help from the bond market over the next six to 12 months.
“Given a strong economy and market and that we only see a few rate cuts over the next year, it’s hard to see the 10-year Treasury yield dropping much from here,” he told The Epoch Times in an email.
“Weakness outside of the US and lower yields on European and Asian government bonds are propping up demand for US Treasuries. While this theme may continue over the next 6-12 months, we think that continued growth and potential inflation in the US will cause longer duration yields to rise in 2025.”
Nonetheless, he remains positive on U.S. equities, as consumer and corporate balance sheets are as strong as ever, and with over $50 trillion in net wealth created since 2020.
“The stock market had a few tremendous years, and valuations are getting heady, but we don’t foresee any imminent dangers on the horizon,” he said.
