Stocks Sell Off on Inflation Fears, Weaker Spending Ahead of Nvidia’s Earnings

Stock market numbers are displayed at the New York Stock Exchange during morning trading on Jan. 24, 2025. Michael Santiago/Getty Images

News Analysis

After a brief rally the previous week, U.S. stocks sold off again last week, led by small caps, amid new signs of rising inflation and slowing consumer spending. Investor disappointment over the Fed’s conservative monetary policy outlook and anxiety over Nvidia’s earnings next week added to the selling pressure.

The S&P 500 ended Feb. 21 at 6,013, down 1.67 percent for the week; the Dow Jones closed at 43,428, down 2.87 percent; the Nasdaq finished the week at 19,524, down 2.11 percent; and the small-cap Russell 2000 was down 3.80 percent to end at 2,195.

Trading in the shorter week began on the positive side, as Apple revealed its iPhone 16e and Microsoft announced a new quantum computer chip that could speed up the development of said quantum computer. These announcements added momentum to the tech sector, which has been leading most of the rallies in recent years.

Traders’ and investors’ moods began to sour on Wednesday afternoon following the release of the Federal Open Market Committee (FOMC) meeting minutes. The report pointed to several upside risks that could push inflation higher for the rest of the year, including Washington’s proposed trade and immigration policy changes.

Potential policy changes include tariffs, which act like sales taxes, raising the cost of foreign products. Immigration policies include mass deportations, reducing the supply of labor and pushing wages higher.

Both contribute to inflation as producers and sellers pass all or part of these costs on to consumers through price hikes that raise inflation and interest rates.

However, equities selling didn’t begin until Thursday morning, as traders and investors had enough time to read between the FOMC lines and realize that lower rates would not help equities continue rallying at their current valuations.

Equity selling worsened during the day as markets began digesting a soft sales outlook for 2025 by retail giant Walmart. This reaffirmed fears of a slowdown in consumer spending, evident in the Michigan January consumer sentiment report and the retail sales report released at the end of the previous week.

The selling pressure accelerated on Friday as Wall Street got more news that the U.S. economy is moving in the wrong direction of higher inflation and slower economic growth.

The University of Michigan’s five-year inflation outlook rose to 3.5 percent in February, the highest level since 1995. This was up from a preliminary 3.3 percent and ahead of January’s 3.2 percent rise.

Meanwhile, the University of Michigan’s U.S. consumer sentiment index was revised sharply lower to 64.7 in February from a preliminary of 67.8. It’s the lowest level since November 2023, confirming that U.S. consumers, the economy’s critical driver, are beginning to scale back their spending plans amid rising prices that squeeze family budgets.

In addition, family spending budgets have been under pressure from rising household debt, which leaves little room for spending on discretionary items.

In another sign of a weakening economy, the S&P Global U.S. Services PMI dropped to 49.7 in February from 52.9 in January, sharply below market expectations of 53. This indicates the first contraction in the services sector activity in more than two years.

The unexpected swing in the service sector, which accounts for nearly two-thirds of the U.S. economy, was led by a near stagnation in new orders. Firms cited worsening new order growth to political uncertainty and spending cuts.

These cuts are no good news for companies relying on new government contracts to boost their top line. For instance, reports that the Trump administration was considering a 10 percent cut in defense spending during the week prompted a sell-off in defense-related stocks, including high-flier Palantir.

Still, another factor added to Wall Street’s anxiety: Nvidia’s earnings release next week. The AI chip maker has a tradition of beating market expectations, fueling the tech rally. However, there’s always the chance for negative surprises when expectations run high and valuations leave little room for disappointment.