U.S. stocks fell on Monday as comments over the weekend from Federal Reserve Chair Jerome Powell tempered investor expectations for interest rate cuts this year. The pullback came after the major indexes reached record highs last week.
Powell Urges Patience on Rate Cuts
In an interview aired Sunday on 60 Minutes, Powell reiterated that the central bank plans to be “patient” when considering whether to cut interest rates to bolster economic growth.
“We think our policy stance is appropriate right now,” Powell stated. “We’re going to be patient. We’re going watch and wait and see how things develop.”
His remarks indicated the Fed is unlikely to cut rates at its next meeting in March, dashing investor hopes for cuts as early as the spring. Stocks sank on Monday as traders pared back bets on rate cuts this year.
| Index | Loss |
|---|---|
| Dow Jones Industrial Average | -0.94% |
| S&P 500 | -1.04% |
| Nasdaq Composite | -1.12% |
Table 1: Losses on major stock indexes on Feb. 5, 2024
Treasury Yields Climb
Alongside the equity selloff, Treasury yields surged higher as expectations for near-term rate cuts faded. The benchmark 10-year Treasury yield jumped 11 basis points to 3.65%, reaching its highest level since November.
Higher long-term rates may raise borrowing costs across the economy, posing a headwind for consumer spending and business investment. However, some strategists argue the move reflects economic strength rather than weakness.
“The dramatic increase in rates is more a sign that the U.S. economy is quite strong rather than falling apart,” said Ryan Detrick, chief market strategist at Carson Group.
Earnings Season Continues
The market turmoil comes amid a busy week for fourth-quarter corporate earnings reports. Heavyweight stocks like Tesla, Walt Disney Co and CVS Health Corp are set to post results this week.
Strong earnings have helped support stocks so far this reporting season. With nearly half of S&P 500 companies having reported, earnings are on track to grow by roughly 2% from a year ago, according to FactSet.
While below the long-term average, the growth suggests resilience among U.S. corporations despite high inflation and slowing economic activity.
Outlook Remains Uncertain
Looking ahead, market volatility could persist as investors continue weighing the prospects for inflation, economic growth and further Fed policy tightening.
However, some analysts argue equities still have room to advance over the longer term.
“We believe valuations and investor sentiment have now reset to levels that provide an attractive entry point,” wrote Mark Haefele, chief investment officer at UBS Global Wealth Management.
With Treasury yields climbing back near 2022 highs, technology and growth stocks sensitive to interest rates may remain under pressure. Still, strategists point to health care, financials and value stocks as potential leaders amid the recent rotation.
As the Fed’s policy path remains subject to change, market participants will closely monitor upcoming economic data for clues on the rate outlook. Friday’s monthly U.S. jobs report is likely to drive significant volatility.
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