Stock Rally Stalls as Bonds Climb on Retail Sales: Markets Wrap

(Bloomberg) — Treasuries climbed as weaker-than-estimated retail sales reinforced the case for the Federal Reserve to cut interest rates this year. Stocks wavered near all-time highs ahead of the key jobs report.

US 10-year yields dropped to the lowest in about a month, with money markets seeing slightly higher odds of three Fed cuts this year – with two already fully priced in. About 330 shares in the S&P 500 rose, but the gauge struggled to gain traction after a solid run. An ETF tracking software firms trimmed most of its earlier surge. Blackstone Inc. was said to be boosting its investment in artificial-intelligence firm Anthropic PBC.

After a strong advance, the US equity benchmark entered a consolidation phase, reflecting a balance between optimism driven by corporate earnings and concerns over economic strength, said Antonio Di Giacomo at XS.com.

US retail sales unexpectedly stalled in December, suggesting consumers provided less firepower for the economy as the year drew to a close.

“It appears that there was less momentum behind the consumer in the final months of 2025 than previously assumed — a less encouraging departure point for growth estimates in 2026,” said Vail Hartman at BMO Capital Markets.

This report “isn’t a disaster,” but it isn’t a constructive signal either, especially with lingering labor-market concerns and continued volatility across several asset classes, according to Bret Kenwell at eToro.

“Tomorrow’s jobs report will be key,” Kenwell said. “A weak print could push sentiment further toward risk-off if growth worries start to build, but a solid print may ease some of those concerns.”

Economists predict a 68,000 rise in January payrolls. Such an outcome would be the best in four months. The unemployment rate is seen holding at 4.4%. There will be an annual revision to the jobs count – which is expected to reveal a markdown in the year through March 2025.

The S&P 500 fell 0.1%. Its equal-weighted version – which strips out market-value biases – climbed 0.5% to a record. The yield on 10-year Treasuries slid six basis points to 4.15%. The dollar wavered. Bitcoin dropped below $70,000.

The value of retail purchases, unadjusted for inflation, was little changed after a 0.6% gain in November. Excluding auto dealers and gasoline stations, sales were also flat. Control-group sales — which feed into the government’s calculation of goods spending for gross domestic product — fell 0.1% after a downwardly revised gain in the prior month.

With the weaker-than-expected core retail sales, fourth-quarter GDP estimates will get trimmed, said veteran Wall Street strategist Peter Boockvar.

“Consumer spending has finally caught up with consumer sentiment, and not in a good way,” said Chris Zaccarelli at Northlight Asset Management.

For months, consumers have been complaining about the cost of everything – and yet they kept spending, he said. However, the latest data show that consumers are no longer relentlessly doing that, he noted.

“To the extent that the labor market holds up and consumers see more cash in their pockets from all of the pro-cyclical measures, then the economy can keep growing,” Zaccarelli said. “But if this is a more permanent change in spending patterns then it could be the canary in the coalmine that signals a more serious slowdown.”

The weaker-than-expected retail sales data for December won’t be enough to spoil the fourth quarter, according to Thomas Ryan at Capital Economics.

“But together with the likely weakness of spending in January amid extreme winter weather in most of the country, it leaves consumption growth on track to slow sharply this quarter,” he said.

The latest news on consumer spending did little to change the outlook for another rate cut, still priced in the Fed funds futures market for the next such move at the June policy meeting, according to Gary Schlossberg at Wells Fargo Investment Institute.

“We still expect looming tax refunds and windfall gains in the stock market to rekindle retail sales and other consumer spending in coming months,” he added.

Fed Bank of Cleveland President Beth Hammack said interest rates could be on an extended hold while officials evaluate incoming economic data. Her Dallas counterpart Lorie Logan said she’s hopeful inflation will continue to come down, though it would take “material” weakness in the labor market for her to support more rate cuts.

Swaps still imply policymakers will leave rates on hold when they meet next month, however, as they did in January when they voted to keep the target range for the federal funds rate at 3.5% to 3.75%.

“We expect a further two rate cuts of 25 basis points from the Federal Reserve this year,” said Mark Haefele at UBS Global Wealth Management. “Solid economic growth, in part supported by productivity gains, is supporting corporate earnings.”

He maintains his June 2026 and December 2026 S&P 500 price targets of 7,300 and 7,700.

Still, UBS Global Wealth Management downgraded the tech sector to neutral, citing a likely deceleration in hyperscaler capex growth, the fact that hardware valuations look full and that uncertainty could linger around software names.

“We recommend that investors maintain strategic exposure to broad technology, AI, and the US market as a whole,” Haefele said. “Moving the US IT sector to neutral is also not a negative view on technology as a whole, and it is important to recognize that there is more to the AI opportunity than this sector.”

Last week’s steep drop in software stocks on concern about competition from artificial intelligence was likely overdone and the US economy remains poised for strong growth this year, according to Goldman Sachs Group Inc.’s chief executive officer.

“I think the narrative over the last week has been a little bit too broad,” David Solomon said Tuesday at a UBS Group AG conference in Key Biscayne, Florida. “There’ll be winners and losers — plenty of companies will pivot and do just fine.”

Ares Management Corp. Chief Executive Officer Michael Arougheti downplayed the idea of trouble in the private credit market and fears of AI disruption, two factors that hammered shares of alternative asset managers recently.

Software stocks have the scope to rebound from their historic slide as the market is pricing in unrealistic near-term disruption from AI, according to JPMorgan Chase & Co. strategists led by Dubravko Lakos-Bujas.

“Given the positioning flush, overly bearish outlook on AI disruption of software and solid fundamentals, we believe the balance of risks is increasingly skewed towards a rebound,” they said.

What we’ve recently seen was not a rejection of AI as a long-term investment theme, but a shift in what investors are willing to underwrite in the near term, according to Lauren Goodwin at New York Life Investments.

“Our conviction in the long-term AI investment case remains intact because hyperscalers are funding capex from profitable core franchise – and because demand for AI chips and infrastructure continues to outpace supply,” she said.

Despite near-term volatility, Goodwin remains constructive on the broader macro backdrop. A confluence of real-time market indicators suggests cyclical improvement is underway: copper prices have risen sharply, small caps and financials are outperforming, and market breadth is improving – all signals consistent with strengthening growth expectations, she said.

“We remain in a global bull market, with participation broadening both internationally and within the US – a constructive and healthy development,” said Keith Lerner at Truist Advisory Services. “Bull markets tend to be more durable when leadership expands.”

Much of the year-to-date action reflects rotation, Lerner noted. Areas that lagged last year, particularly cyclical and economically sensitive groups, have led as growth expectations have improved, while money rotated out of last year’s biggest winners in technology and AI, he added.

“While we are watching closely for any signs of technical deterioration, we continue to see merit in balancing cyclical exposure, including small- and mid-caps, alongside technology,” Lerner said.

The cross-currents facing the economy – AI disruption, restrictive monetary policy, late-cycle labor dynamics, and geopolitical uncertainty – reinforce the need for discipline in portfolio construction, noted Goodwin.

“Upcoming jobs and inflation data represent a critical crossroads for the Fed – and for near-term market sentiment,” she concluded. “Markets are searching for confirmation that growth is slowing just enough to justify further policy easing, but not so much to risk breaking.”

A survey conducted by 22V Research showed that 42% of investors bet Wednesday’s jobs data will be “risk on,” 37% said “mixed/negligible” and 21% “risk off.” The tally also underscored a shift in investors’ focus to payrolls as the most-important labor indicator to watch.

“Investor estimates of payrolls based on their expectations for the market reaction indicate investors think strong data will be ‘mixed/negligible’,” said Dennis DeBusschere, founder of 22V. “Risk-on expectations align with slightly lower payrolls data, but still cluster around the ‘mid-50s.’ Risk-off expectations are around weaker payrolls numbers.”

JPMorgan strategists including Bram Kaplan note that the S&P 500 options market is generally underpricing upcoming data releases compared to historical swings after these events.

That’s especially the case for Wednesday’s US nonfarm payrolls, where past moves were nearly double what is currently being priced. Next-month options are also pricing in a modest move for the following report.

US PREVIEW: Payroll Revisions to Flag Need for Fed Rate Cuts

The Fed chose to hold interest rates steady in January given signs of stabilization in the labor market and inflation that’s still elevated. Fed Governors Christopher Waller and Stephen Miran both dissented in favor of another rate cut.

In Friday’s consumer pridex index, economists will look for more evidence that inflation is on a downward trend after previous reports were complicated by last year’s record-long government shutdown. Forecasters expect an underlying metric of inflation — which excludes food and energy costs — to rise at the slowest annual pace since early 2021.

Meantime, equity markets are moving more money than ever before, blowing past $1 trillion in shares traded each day as heavy volume becomes the new norm. The jump reflects a broad-based increase in participation across the market.

The surge marks a sharp step-up from a year ago. Equity turnover averaged a record $1.03 trillion in January, a roughly 50% increase from the same period in 2025, according to data compiled by Bloomberg Intelligence. More than 19 billion shares traded hands daily over the span, the second-most ever, the data show.

Corporate Highlights:

Alphabet Inc. raised almost $32 billion in debt in less than 24 hours, showing the enormous funding needs of tech giants competing to build out their artificial intelligence capabilities — and the huge appetite from credit markets to fund them. Tesla Inc. tapped a leader of its European operations to oversee electric-vehicle sales globally in the latest leadership change at the company’s struggling automotive business. Apple Inc. and Alphabet Inc.’s Google committed to making app stores changes to ensure fairness to developers and consumers, the UK’s antitrust watchdog said announcing the first assurances from Big Tech firms under the country’s digital market rules. Instagram owner Meta Platforms Inc. has paid for thousands of television commercials to promote its safety work with teens ahead of a landmark jury trial that will examine whether the company builds products deliberately to get kids addicted to social media. Paramount Skydance Corp. made enhancements to its hostile offer for Warner Bros. Discovery Inc., addressing some of the company’s concerns in an effort to thwart a rival deal with Netflix Inc. Spotify Technology SA jumped after the Swedish music streaming giant added a record number of users last quarter, far surpassing analysts’ expectations. McDonald’s Corp. named Ford Motor Co. Chief Executive Officer Jim Farley to its board of directors, bringing one of the auto industry’s most outspoken executives to the burger chain that typically tries to stay out of the fray on hot-button issues. Coca-Cola Co. offered a more conservative 2026 full-year sales outlook than expected, as the soda company works to boost its sales overseas. Coca-Cola will retain full ownership of Costa Coffee, but it’s reviewing the unit’s challenged business in China, the company’s chief financial officer said. Harley-Davidson Inc. shares recovered after executives forecast retail sales would be flat to slightly higher this year after a sharp, unexpected drop in fourth-quarter bike shipments sparked a rout in the stock. Marriott International Inc. said it expects credit card fees to grow thanks to an increase in the royalty rate it charges branding partners. CVS Health Corp. missed Wall Street’s profit projections for 2026, failing to clear the high bar the market set for the company after saying in December all of its business units would grow this year. Under Armour Inc. was downgraded to sell from neutral at by Citigroup Inc., which cited caution on the NAM brand turnaround, including “a highly competitive environment” and weak direct-to-consumer traffic. Saks Global Enterprises said it’s closing more than 10% of its full-price stores across the US as part of its efforts to emerge from bankruptcy as a smaller and more profitable department-store operator. US regulators rejected Regenxbio Inc.’s gene therapy for Hunter syndrome, underscoring the hard line the Trump administration is taking on drug approvals for rare diseases. S&P Global Inc., a company that rates bonds and sells market data, slumped as much as 11% after the company reported a 2026 profit forecast that fell short of analyst expectations. Fiserv Inc. forecast a gloomier year for growth and profits on Wednesday as the payments firm absorbs expenses from a strategic overhaul that is still in early stages. Williams Cos. plans to build a natural gas-fueled power plant and expand two other generation projects to supply data center developers. McKinsey & Co. agreed to hand control of its $20 billion investment arm to Neuberger Berman, after decades of managing the fortunes of the consulting firm’s current and former partners in sophisticated hedge fund and alternative strategies. AstraZeneca Plc expects profit to grow further this year, boosted by sales of its cancer drugs as it works to offset a patent expiry of a blockbuster diabetes medicine. BP Plc is halting share buybacks to shore up its balance sheet as pressure mounts on the UK energy giant to deliver on its turnaround. Barclays Plc said it will return at least £15 billion ($20.5 billion) to shareholders through 2028 as it continues to work through a long-term plan to slash costs and improve profitability. Commerzbank AG plans to start a new €540 million ($643 million) share buyback after full-year earnings beat analysts’ estimates. Stellantis NV is looking to exit its US battery joint venture with South Korea’s Samsung SDI Co. as the automaker unwinds electric-vehicle bets and tries to preserve cash after announcing more than €22 billion ($26 billion) in writedowns last week. Ferrari NV issued new targets for 2026 that reassured investors about the supercar maker’s ability to sustain growth and margins through geopolitical turbulence and a major product transition. Better-than-expected sales at top brand Gucci sent Kering SA shares soaring as investors bet new Chief Executive Officer Luca de Meo will revive growth at the struggling luxury group. Taiwan Semiconductor Manufacturing Co.’s January sales grew at their fastest clip in months, a sign of sustained global AI spending even as concerns persist about an industry bubble. Alibaba Group Holding Ltd. debuted an AI model that can help robots and other devices perform real-world tasks, taking another step toward an eventual goal of leading multiple artificial intelligence spheres. Vitol Group’s long-standing chief financial officer Jeff Dellapina will retire and be replaced by Asia finance boss Jay Ng, the latest in a series of leadership changes in the global commodity trading industry. Some of the main moves in markets:

Stocks

The S&P 500 fell 0.1% as of 2:52 p.m. New York time The Nasdaq 100 fell 0.3% The Dow Jones Industrial Average rose 0.2% The MSCI World Index was little changed Bloomberg Magnificent 7 Total Return Index fell 0.2% Philadelphia Stock Exchange Semiconductor Index fell 0.4% IShares Expanded Tech-Software Sector ETF rose 0.6% The Russell 2000 Index was little changed S&P 500 Equal Weighted Index rose 0.5% Currencies

The Bloomberg Dollar Spot Index was little changed The euro fell 0.1% to $1.1897 The British pound fell 0.3% to $1.3651 The Japanese yen rose 1% to 154.39 per dollar Cryptocurrencies

Bitcoin fell 1.7% to $69,149.01 Ether fell 4.8% to $2,020.15 Bonds

The yield on 10-year Treasuries declined six basis points to 4.15% Germany’s 10-year yield declined three basis points to 2.81% Britain’s 10-year yield declined two basis points to 4.51% The yield on 2-year Treasuries declined three basis points to 3.46% The yield on 30-year Treasuries declined seven basis points to 4.79% Commodities

West Texas Intermediate crude fell 0.4% to $64.12 a barrel Spot gold fell 0.6% to $5,027.78 an ounce ©2026 Bloomberg L.P.