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

Yields on 10-year Treasuries fell four basis points to 4.61%. Wall Street experienced a challenging day as stocks struggled to maintain momentum following a recent rally, while bond yields declined after dovish comments from Federal Reserve Governor Christopher Waller.

Market participants paid close attention to comments made by Scott Bessent, the Treasury secretary nominee, who warned that the US could face an economic crisis if the 2017 Republican tax cuts are not extended. Following nearly a 2% increase in the S&P 500, equities saw a slight decrease, primarily driven by a decline in major technology stocks. Solid earnings reports from firms such as Bank of America and Morgan Stanley were insufficient to lift the overall market.

"Investors are taking a step back after yesterday’s significant rally," remarked Jose Torres from Interactive Brokers.

Treasuries gained ground as Waller indicated in a CNBC interview that officials might consider lowering interest rates in the first half of 2025 if inflation trends remain favorable. He also mentioned that a rate cut in March could not be completely dismissed. Swap trading showed expectations for potential easing this year.

The US dollar remained near its highest levels in two years, with Bessent emphasizing the importance of keeping the dollar as the world's reserve currency. He expressed optimism that President-elect Donald Trump’s economic policies could drive inflation closer to the Federal Reserve's target.

The S&P 500 dropped 0.2%, with the Nasdaq 100 losing 0.7% and the Dow Jones Industrial Average declining by 0.2%. The "Magnificent Seven" tech stocks fell, contributing to a 1.9% drop in their overall index. However, the Russell 2000 managed to gain 0.2%, while the KBW Bank Index fell by 0.2%.

Despite the equity market's struggles, some positive signals emerged from broader retail data and sentiment surveys. The American Association of Individual Investors reported a decrease in bullish sentiment, as expectations for rising stock prices slid to 25.4%, well below the historical average of 37.5%.

“We view extreme sentiment indicators as reliable contrarian indicators,” noted Larry Tentarelli from Blue Chip Daily Trend Report, adding that investors tend to be overly optimistic at market peaks and pessimistic at lows.

Looking ahead, Bank of America suggested that a third consecutive year of significant gains in US stocks, a trend not seen since the 1990s, could be a surprise for 2025. However, the bank cautioned that achieving such performance would be challenging due to high valuations and risks associated with concentrated investments and economic policies.

As market participants analyzed corporate earnings, economic data released showed mixed results. While homebuilders expressed caution about sales prospects, retail sales figures indicated strong consumer performance during the holiday season.

Expert opinions suggest that the upcoming earnings season will allow investors to refocus on individual companies amid macroeconomic uncertainties. David Lefkowitz from UBS Global Wealth Management expressed a continued positive outlook on US equities.

Yet, Helen Jewell at BlackRock warned that even with solid earnings, a sustained rally may prove difficult due to ongoing concerns over economic growth and inflation pressures. "I anticipate a turbulent reporting season, particularly regarding how market reactions differ between beats and misses, especially at such high valuation levels," she stated.

In parallel, it was observed that investor interest in the largest technology companies has increased, with little inclination to hedge their positions less than two weeks ahead of earnings for the sector. Discretionary investors have lifted their stakes in megacaps, growth, and tech stocks to their highest levels since July, as reported by Deutsche Bank AG.

Corporate Highlights

• Morgan Stanley reported a fourth-quarter profit that doubled, driven by elevated trading revenue due to market volatility linked to the US elections.

• Bank of America outperformed analysts’ predictions for fourth-quarter profits, benefiting from robust investment-banking fees and higher net interest income.

• PNC Financial Services and U.S. Bancorp provided cautious forecasts for net interest income in the upcoming quarter, given uncertainty over how lower interest rates might impact lending.

• Microsoft announced a price increase for its Office apps as it gears up to introduce new artificial intelligence features.

• UnitedHealth Group faced rising medical costs in the fourth quarter, resulting in revenue that fell short of expectations.

• Target raised its sales outlook following an unexpectedly strong holiday season, although concerns about profitability lingered.

• American Express will pay around $230 million to settle a long-standing investigation regarding misleading practices towards small-business customers.

• Rio Tinto and Glencore are reportedly discussing a potential merger, which could lead to a significant consolidation in the mining sector.

• Reliance Industries achieved a quarterly profit that surpassed expectations, buoyed by successes in its telecom and retail divisions despite challenges in its petrochemical sector.

• Taiwan Semiconductor Manufacturing Company projected quarterly figures above analyst estimates, indicating that AI hardware spending is expected to remain strong in 2025.

Upcoming Key Events

• China GDP and economic data - Friday

• Eurozone CPI - Friday

• US housing starts - Friday

In summary, here are the main movements in the market:

Stock Performance

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

• The Nasdaq 100 fell by 0.7%.

• The Dow Jones Industrial Average dropped by 0.2%.

• The MSCI World Index remained relatively unchanged.

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

• The Russell 2000 Index increased by 0.2%.

• The KBW Bank Index declined by 0.2%.

Currency Movements

• The Bloomberg Dollar Spot Index rose by 0.1%.

• The euro stayed steady at $1.0298.

• The British pound decreased by 0.1% to $1.2229.

• The Japanese yen appreciated by 0.8% to 155.22 per dollar.

Cryptocurrency Changes

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

• Ether decreased by 3% to $3,329.5.

Bond Yields

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

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

• The UK’s 10-year yield fell by five basis points to 4.68%.

Commodity Prices

• 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.

Stocks, Bonds, Economy