On December 27, a wave of unexpected sell-offs swept through the US stock market, marking a notable decline in the major indicesThe Nasdaq Composite, in particular, experienced a significant drop, plummeting over 2% at one point during the trading dayBy the close of the market, the Dow Jones Industrial Average had fallen by 333.59 points, which represented a decline of 0.77%, finishing at 42,992.21 pointsThis marked the end of a five-day winning streak for the indexMeanwhile, the Nasdaq lost 298.33 points, falling 1.49% to below the psychologically important barrier of 20,000 points, and the S&P 500 dipped by 66.75 points, or 1.11%, to close at 5,970.84 points.

Despite this setback, it’s worth noting that all three major indices had posted gains earlier in the week, with the Dow gaining 0.35%, the S&P 500 increasing by 0.67%, and the Nasdaq rising 0.76% overallThe market’s turmoil on Friday was primarily driven by a sell-off in several sectorsEvery sector within the S&P 500 faced declines, with the consumer discretionary and technology sectors leading the charge downwards with losses of 1.90% and 1.49%, respectivelyNotably, several large technology stocks faced significant headwindsTesla saw a nearly 5% drop, Nvidia fell more than 2%, and Apple experienced a 1.30% declineOther tech giants, including Microsoft, Netflix, Google, and Amazon, each also lost over 1% of their value, while Intel and Meta saw smaller dips.

In the semiconductor realm, the situation was similarly bleak, as the Philadelphia Semiconductor Index fell over 1%. Noteworthy performers included Wolfspeed, which plummeted more than 7%, and NXP Semiconductors, which lost over 2%. Broadcom, Marvell Technology, and Micron Technology also registered losses exceeding 1%, while Intel's decline was comparatively modest at 0.68%.

Moreover, artificial intelligence-related stocks also took a beating

Advertisements

AMD exhibited a steep decline of over 5%, alongside Palantir and BullFrog AI, which both fell more than 3%. The AI sector, which had previously shown promise, appears to have succumbed to broader market fears.

Another notable issue was the Russell 2000 index, which represents small-cap stocksThis index fell by a staggering 1.9%, bringing its total decline for December to over 8%. Market analysts are bracing for what could be the worst monthly performance since September 2022. Interestingly, the recent downturn occurred despite the absence of significant economic data releases or breaking news, leaving many in the market surprised by the intensity and timing of the pullback.

Analysts on Wall Street suggest that the lingering influences of the 10-year US Treasury yield— a critical benchmark that plays a pivotal role in asset pricing—have contributed to this market pressureThe rising yield tends to increase costs for borrowing while diminishing the attractiveness of equities, leading to sell-offsAs the yield hit near seven-month highs, fears intensified for those invested in the stock market.

The uptick in the 10-year Treasury yield has furthered market concerns, particularly after last week’s report noting that jobless claims in the United States did little to alleviate fears surrounding the Federal Reserve's monetary policy directionWith the yield reaching approximately 4.629%—the highest level in nearly seven months—market sentiment softenedSince the beginning of December, this yield has surged more than 40 basis points, with forecasts predicting that the Fed might adopt a more hawkish approach in 2025. The next Federal Reserve meeting is set for late January 2025, where interest rates are anticipated to remain unchanged.

Market analysts, like Paul Hickey from Bespoke Investment Group, caution that if the yield exceeds 4.70% in the next few days, it could further disrupt the stock market’s stability

Advertisements

As it stands, many on Wall Street anticipate the continued increase of the 10-year Treasury yield as a prevailing trend.

Looking ahead into next year, Wells Fargo predicts that the 10-year yield could reach 5%. Analysts at Bank of America echo this sentiment, suggesting an upward trajectory in yields due to an anticipated increase in government bond supplies in 2025.

The market is currently on edge, as it awaits January 10th’s labor market report, which will shed light on the health of the US economyWith numerous companies gearing up to release their fourth-quarter earnings, investors are bracing themselves for potential revelations that could influence trading dynamics.

As the year draws to a close, it is particularly telling that expectations for tech stocks have soared following a banner year in 2024. Analysts forecast nearly 30% earnings growth for the technology sector in 2025; however, the current market valuation for these stocks already implies an estimated growth of almost 40%. This disconnect between expectation and reality may pave the way for necessary corrections in the near future.

Additionally, year-end tax-related sell-offs have exacerbated market volatilityCFRA Market Strategist Sam Stovall notes that investors originally intended to hold off on realizing profits until next year to defer taxes until 2026, but growing concerns over profit sustainability have led them to secure earnings prematurelyWith the Nasdaq having surged over 30% this year alone, uncertainty in the market has spurred fears regarding inflationary pressures as 2025 approaches.

Simultaneously, the US stock market remains exposed to risks of heavy fund sell-offs that could further amplify short-term volatilityData from Bank of America indicates that approximately $35 billion flowed out of the US stock market in just one week—representing the highest weekly outflow since December 2022. In stark contrast, the week prior had witnessed record inflows of $62 billion, illustrating the sharp pivot in investor sentiment.

Goldman Sachs estimates that US pensions will offload around $21 billion worth of US stocks and will match that number with equal amounts in bond purchases by the end of December

Advertisements

Advertisements

Advertisements