The United States economy has once again presented a paradox for Wall Street, with better-than-expected reports on the job market and business activity leading to a slump in stock prices. The S&P 500 fell by 1.1%, while the Dow Jones Industrial Average dropped by 178 points (0.4%), and the Nasdaq composite tumbled by 1.9%. This downturn comes despite strong indicators that the economy is performing well.
Rising Bond Yields Weigh on Stocks
The increase in bond yields immediately following the release of the encouraging economic reports was a major factor contributing to the decline in stock prices. As yields rose, investors became more attracted to the safer and higher-yielding Treasury bonds, which led to downward pressure on stocks. The yield on a 10-year Treasury climbed to 4.69% from 4.63% shortly before the release of Tuesday’s reports.
Inflation Concerns Remain
The strong economy could lead to upward pressure on inflation, which has remained stubbornly above the Federal Reserve’s 2% target. Expectations for fewer interest rate cuts in 2025 have already been building, and worries about other possible policies, such as tax cuts, that could swell the U.S. government’s debt and push yields higher continue to weigh on investors’ minds.
Nvidia Takes a Hit
The technology sector was particularly hard hit, with Nvidia losing 6.2% after its CEO unveiled a suite of new products and partnerships the night before. The company had been on track to set another all-time high in morning trading but reversed direction after the economic reports were released.
Bank of America Strategists Weigh In
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 means that any positive indicators could lead to increased expectations for future interest rate cuts, which in turn would put upward pressure on yields and weigh on stocks. The stakes are high ahead of Friday’s update on the U.S. job market, with economists expecting a slowdown in overall hiring.
Goldilocks Scenario
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.
Some Stocks Manage to Rise
A few stocks managed to buck the trend and rise on Tuesday, including Cintas, which climbed 2% after making public its offer to buy its smaller rival, UniFirst, for $275 per share in cash. Shutterstock and Getty also rose after they announced they were joining forces to become a $3.7 billion visual content company.
Global Markets React
In other markets abroad, some 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.
