The good news on the U.S. economy, which had been a welcome respite from earlier fears of a recession, has turned bad again for Wall Street. The stock market slumped on Tuesday following better-than-expected reports on the job market and business activity.
Stock Market Declines
The S&P 500 fell by 1.1% after giving up an early gain. The Dow Jones Industrial Average dropped by 178 points, or 0.4%, while the Nasdaq composite tumbled by 1.9%. Stocks plummeted under the weight of rising yields in the bond market, which jumped immediately after the release of the encouraging reports on the economy.
Job Market and Business Activity
One report said that U.S. employers were advertising more job openings at the end of November than economists had expected. The other report stated that activity for finance, retail, and other services businesses grew much faster in December than anticipated. These strong reports are good news for workers looking for jobs and those worried about a possible recession.
Pressure on Inflation
However, such a solid economy could also keep up pressure on inflation, making it less likely for the Federal Reserve to deliver the cuts to interest rates that Wall Street loves. The Fed began cutting its main interest rate in September to give the economy a boost but hinted at a slowdown in easing.
Tariffs and Inflation
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. Tuesday’s report on U.S. services industries from the Institute for Supply Management also contained discouraging trends on inflation.
Expectations for Interest Rate Cuts
Expectations for fewer cuts to interest rates in 2025 had already been building for weeks, which sent longer-term Treasury yields upward. So have worries about other possible Trump policies, such as tax cuts, which could swell the U.S. government’s debt and push yields higher.
Higher Yields and Pressure on Stocks
Those higher yields make Treasury bonds more attractive to investors who might otherwise buy stocks. This, in turn, puts 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.
Impact on Stock Prices
The higher yields can put heavy pressure on stocks seen as the most expensive. This 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.
Shift in Market Environment
"Now that worries from the summer about a potentially slowing U.S. economy have abated and the 10-year Treasury yield is firmly above 4.50%, ‘we believe the market is shifting into a ‘good news is bad news’ environment again,’" according to Bank of America strategists led by Ohsung Kwon.
Upcoming Job Market Update
The stakes are high for Friday’s coming update on the U.S. job market, which economists expect will show a slowdown in overall hiring. This could further dampen investor sentiment and lead to more losses for stocks.
Other Market News
In other news, 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.
Tencent, SenseTime, and CATL were among the companies added to the list. Tencent’s stock that trades in Hong Kong fell by 7.3%. This helped pull the Hang Seng index down 1.2%, but indexes were stronger elsewhere in China and across much of Asia and Europe.
Conclusion
The good news on the U.S. economy has turned bad again for Wall Street, with stocks plummeting under the weight of rising yields in the bond market. The solid economy could keep up pressure on inflation, making it less likely for the Fed to deliver interest rate cuts that Wall Street loves.