US Stocks Stage Rebound As Dip Buyers Wade Back In: Markets Wrap

The S&P 500 rose by 0.2% while the Nasdaq 100 saw a decline of 0.3%. The Dow Jones Industrial Average climbed 0.9% amidst a renewed wave of dip buying that sparked a rebound in the stock market. This rebound followed a sell-off influenced by adjustments to expectations regarding the Federal Reserve's monetary policy.

Nearly 380 companies within the S&P 500 index saw gains, with the index recovering from an earlier decline that had reached almost 1% on Monday. Energy stocks benefited from a rally in oil, while banking stocks also rose ahead of the impending earnings season.

This positive momentum came despite declines in major technology companies, including Apple and Nvidia Corp. The bond market experienced minor fluctuations following a sell-off, which was driven by speculation regarding fewer rate cuts from the Fed this year due to persistent inflationary pressures.

Chris Larkin of E*Trade, a part of Morgan Stanley, noted that while cooler-than-expected inflation data might not spur the Fed to cut rates this month, it could help temper some of the recent bearish sentiment. Meanwhile, Callie Cox from Ritholtz Wealth Management observed that while earnings expectations have been slashed aggressively, the extent of these cuts has been notable and upcoming reports may provide stabilizing support for the market.

Cox emphasized the importance of understanding the strong fundamentals of the economy. "High expectations initially led to setbacks, but this dip may attract buyers due to the robust economic foundation," she remarked.

In market performance, the S&P 500 increased by 0.2%, while the Nasdaq 100 decreased by 0.3%. The Dow Jones Industrial Average rose by 0.9%. The Bloomberg index tracking the major tech stocks, dubbed the Magnificent Seven, experienced a slight decline of 0.4%. On the other side, the Russell 2000 index, which reflects smaller companies, gained 0.2%.

The yield on 10-year U.S. Treasury bonds increased by three basis points to 4.79%. The Bloomberg Dollar Spot Index remained mostly unchanged. Oil prices surged to their highest levels in five months.

Analysts at Bloomberg Intelligence indicated that they believe analysts may have overreacted in their rapid cuts to earnings estimates. They noted that the fourth-quarter estimates now appear low enough to be easily surpassed, although 2025 estimates might continue to experience downward revisions.

The focus will turn to earnings this week, particularly from the financial sector. Major banks like JPMorgan Chase and Wells Fargo are anticipated to show profits in trading and investment banking, which have helped mitigate declines from net interest income due to increased deposits and lower loan demand.

Market analysts are keen to learn more about the banks' outlooks, especially in light of recent Fed indications of fewer planned rate cuts, which could potentially impede future profit growth.

Michael Landsberg from Landsberg Bennett Private Wealth Management pointed out that large banks often provide valuable insights into consumer-oriented companies’ future performance, suggesting that increased credit card usage could reflect positively on those firms.

Megan Horneman from Verdence Capital Advisors noted that while economic growth appears resilient despite ongoing inflation, a slowdown is expected in 2025, leading to potentially overly optimistic current earnings projections for that year. Horneman will be closely observing executives' comments about inflation, labor market conditions, consumer spending, and the implications of a new administration on their revenues.

Options traders are preparing for what could be one of the most volatile earnings periods on record. They predict that individual stocks within the S&P 500 could see an average price movement of 4.7% in either direction after earnings releases, which would mark the largest movements recorded on earnings days.

HSBC's strategists have identified a mild buy signal shown by sentiment and positioning indicators. They suggest that negative economic data could provide a favorable buying opportunity for risk assets at this time.

Economically, underlying U.S. inflation is expected to have only slightly decreased toward the end of 2024, reinforcing the Fed's cautious approach toward further rate cuts. According to economists, the consumer price index (CPI), excluding food and energy, is projected to rise by 0.2% in December after four consecutive months of 0.3% increases. The core CPI is expected to show a year-over-year increase of 3.3%, consistent with previous months' readings.

Market reactions have seen significant sensitivity to macroeconomic announcements, with the S&P 500 experiencing swings of at least 1% in either direction on eight out of the last 15 trading days since the Fed's most recent rate decision.

Michael Kantrowitz, chief investment strategist at Piper Sandler, stated that stock sentiment is now more closely aligned with bond yields than it has been in the last 30 years. He suggests that any market weakness is more likely to stem from rising interest rates rather than slowing economic growth. This perspective has emerged following a substantial shift witnessed in stock valuation strategies since late 2022.

Recent data suggests a changing landscape in institutional investors' positions in equities, as reflected in a notable decrease in the funding spread for investments in equity derivatives. Strategists from Goldman Sachs noted that a decline from around 130 basis points in December to approximately 70 basis points now indicates that professional investors are becoming net sellers of stocks.

Corporate Highlights

• Apple Inc. reported a decline of about 5% in iPhone sales worldwide in the last quarter, impacted by disappointing product upgrades and increased scrutiny from competitors in China.

• The White House announced new restrictions on the sale of advanced AI chips by Nvidia and its competitors, prompting industry pushback regarding how these measures will be implemented.

• Macy's Inc. has issued a pessimistic forecast for its sales in the current quarter, suggesting that management may have overestimated expectations for a strong holiday shopping season.

• Honeywell International Inc. is reportedly preparing to split its operations after pressure from the activist group, Elliott Investment Management.

• Cleveland-Cliffs Inc. confirmed interest in submitting a joint bid for United States Steel Corp. alongside Nucor Corp.

• Lululemon Athletica Inc. anticipates that its fourth-quarter sales will exceed market expectations, indicating resilience against emerging competition.

• Abercrombie & Fitch Co. revised its fourth-quarter sales outlook upward due to stronger-than-expected holiday performance, yet concerns linger about sustaining this growth.

• Shake Shack Inc. surpassed sales expectations for the fourth quarter, demonstrating the effectiveness of its strategies to enhance customer service and brand visibility.

• Health insurance providers in the private Medicare Advantage sector could potentially see larger payment increases in 2026 under a new proposal from the incoming administration.

• Moderna Inc. significantly lowered its sales projections for the year amid sluggish demand for its COVID-19 and RSV vaccines.

• Johnson & Johnson has agreed to acquire Intra-Cellular Therapies Inc. for approximately $14.6 billion, focusing on treatments for central nervous system disorders.

Key Events This Week

• U.S. Producer Price Index (PPI), Tuesday

• Speeches by Fed officials John Williams and Jeffrey Schmid, Tuesday

• Eurozone industrial production data, Wednesday

• Earnings reports from Citigroup, JPMorgan, Goldman Sachs, Bank of New York Mellon, Wells Fargo, and BlackRock, Wednesday

• U.S. Consumer Price Index (CPI), Empire manufacturing data, Wednesday

• Speeches by Fed officials including John Williams, Tom Barkin, Austan Goolsbee, and Neel Kashkari, Wednesday

• TSMC earnings report, Thursday

• ECB's release of the account from the December policy meeting, Thursday

• Earnings reports from Bank of America and Morgan Stanley, Thursday

• U.S. initial jobless claims, retail sales, and import prices data, Thursday

• China's GDP, property prices, retail sales, and industrial production data, Friday

• Eurozone CPI data, Friday

• U.S. housing starts and industrial production data, Friday

This week’s market movements and economic releases will potentially set the stage for further stock performance and investor sentiment moving forward.

stocks, earnings, inflation