The good news on the U.S. economy has once again turned bad for Wall Street, with stocks slumping on Tuesday following better-than-expected reports on the job market and business activity.
Stock Market Drops After Encouraging Economic Reports
The S&P 500 fell 1.1% after giving up an early gain, while the Dow Jones Industrial Average dropped 178 points (0.4%) and the Nasdaq composite tumbled 1.9%. The stock market’s decline was attributed to rising yields in the bond market, which jumped immediately after the release of the encouraging reports on the economy.
Job Market and Business Activity Reports
One report indicated that U.S. employers were advertising more job openings at the end of November than economists expected. Another report showed that activity for finance, retail, and other services businesses grew much faster in December than expected.
While these strong reports are good news for workers looking for jobs and those worried about a possible recession, they also put pressure on inflation and make it less likely that the Federal Reserve will deliver interest rate cuts that Wall Street loves. The Fed has been cutting its main interest rate since September to boost the economy, but it has hinted at a slowdown in easing.
Inflation Concerns and Interest Rate Cuts
The threat of tariffs from President-elect Donald Trump has raised worries about possible upward pressure on inflation, which has stubbornly remained just above the Fed’s 2% target. Expectations for fewer cuts to interest rates in 2025 have been building for weeks, sending longer-term Treasury yields upward.
Higher Yields and Bond Market Pressure
The higher yields make Treasury bonds more attractive to investors who might otherwise buy stocks, putting downward pressure on stock prices. The yield on a 10-year Treasury climbed to 4.69% from 4.63% shortly before the release of Tuesday’s reports, and from just 4.15% in early December.
Pressure on Expensive Stocks
The higher yields can put heavy pressure on stocks seen as the most expensive, which pulls the lens toward Nvidia and other Big Tech stocks that have soared in the frenzy around artificial-intelligence technology. Nvidia had been on track to set another all-time high in morning trading after CEO Jensen Huang unveiled a suite of new products and partnerships.
Nvidia’s Losses
But after Tuesday morning’s economic reports, which hit the market after its first half hour of trading, Nvidia swung to a loss of 6.2% and became the heaviest weight on the S&P 500. Losses for Amazon, Tesla, Apple, and Microsoft were the next-strongest forces dragging the index lower.
Bank of America Strategists’ Views
According to Bank of America strategists led by Ohsung Kwon, ‘we believe the market is shifting into a "good news is bad news" environment again.’ This raises the stakes for Friday’s coming update on the U.S. job market, which economists expect will show a slowdown in overall hiring.
Goldilocks Reading
A ‘Goldilocks’ reading for the U.S. stock market that would be solid but not too strong for the Fed would likely be in the 125,000 to 175,000 range, along with an unemployment rate of 4.2%, according to Bank of America.
Positive Developments
Helping to keep Tuesday’s losses for U.S. stock indexes in check was Cintas, which rose 2% after making public its offer to buy its smaller rival, UniFirst, for $275 per share in cash.
Mergers and Acquisitions
Allied with this were the news that Getty Images and Shutterstock are joining forces to become a $3.7 billion visual content company to provide customers with a broader array of still imagery, video, music, 3D, and other media. Getty Images shareholders will own a slight majority of the combined company.
Global Markets
In stock markets abroad, some notable Chinese companies fell after the U.S. Defense Department added dozens of them to a list of companies it says have ties to China’s military. The announcement caused some of the companies to protest and say they will seek to have the decision reversed.
Added to the list were gaming and technology company Tencent, artificial intelligence firm SenseTime, and the world’s biggest battery maker CATL. Tencent’s stock that trades in Hong Kong fell 7.3%.
Hang Seng Index
That helped pull the Hang Seng index down 1.2%, but indexes were stronger elsewhere in China and across much of Asia and Europe.
Contributing Writers:
- Yuri Kageyama
- Matt Ott
