S&P 500 Halts Rally as Bonds Climb on Retail Sales: Markets Wrap

(Bloomberg) — Wall Street traders gearing up for the key jobs report drove a rally in Treasuries after weak retail sales bolstered the case for the Federal Reserve to lower interest rates this year. Still, those bets weren’t enough to lift the S&P 500 to fresh all-time highs. Bitcoin sank.

Ten-year yields dropped to the lowest in about a month, with money markets seeing slightly higher odds of three Fed cuts in 2026 – with two already fully priced in. About 300 shares in the US equity benchmark rose, but the gauge lost steam amid weakness in several tech names. A gauge of chipmakers dropped while an ETF tracking software firms trimmed most of its earlier surge.

After a strong advance, the S&P 500 entered a consolidation phase, reflecting a balance between optimism driven by corporate earnings and concerns over economic strength, according to 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 65,000 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 0.3%. Both its equal-weighted version – which strips out market-value biases – and the Dow Jones Industrial Average closed at all-time highs. The Nasdaq 100 lost 0.6%. The yield on 10-year Treasuries slid six basis points to 4.14%. 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.

Looming tax refunds and windfall gains in the stock market could rekindle retail sales and other consumer spending in coming months, according to Gary Schlossberg at Wells Fargo Investment Institute.

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%.

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.

“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. The gauge closed at 6,941.81 on Tuesday.

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.”

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 at 22V.

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.

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. Blackstone Inc. is increasing its investment in artificial intelligence firm Anthropic PBC, elevating its stake to roughly $1 billion at the startup’s current valuation, according to people familiar with the matter. 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. Ford Motor Co. expects profit to jump in 2026 after being saddled with a surprise tariff bill at the end of last year. Gilead Sciences Inc. forecast 2026 product revenue and profit that missed analysts’ expectations, even after it outperformed during last year’s fourth quarter. Lyft Inc. posted a surprise $185 million operating loss in the fourth quarter and issued a disappointing earnings forecast for the start of the year, a sign that its global expansion and new product offerings may weigh on profits in the short term. Robinhood Markets Inc. reported lower fourth-quarter profit as sharp declines in Bitcoin and other cryptocurrencies weighed on results at the online brokerage. American International Group Inc. reported fourth-quarter profit that beat analysts’ expectations, driven by a boost in underwriting income and on the heels of key partnerships and acquisitions the insurer expects to boost earnings in 2026. Walt Disney Co. priced $4 billion of bonds, its first sale since 2020, as the company joined a record rush of activity as companies lock in lower borrowing premiums. Electronic Arts Inc.’s bonds plunged as the prospective buyers of the videogame maker launched a buyback offer that tied the notes’ prices to US Treasuries. 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. 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. 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. 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. CVS Health Corp. disappointed Wall Street by reiterating its profit guidance for 2026, a move analysts are calling a letdown after a strong fourth-quarter performance. 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. FTX co-founder Sam Bankman-Fried filed a long-shot request for a new trial on the charges for which he’s currently serving a 25-year prison sentence, arguing that new witnesses can refute the prosecution’s case that he defrauded the cryptocurrency exchange’s customers. 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. QVC Group Inc. is negotiating a voluntary debt restructuring agreement with its creditors that could be implemented as part of a Chapter 11 bankruptcy process, as the television shopping network grapples with viewer declines and a heavy debt burden. S&P Global Inc., a company that rates bonds and sells market data, slumped after reporting a 2026 profit forecast that fell short of analyst expectations. Some of the main moves in markets:

Stocks

The S&P 500 fell 0.3% as of 4 p.m. New York time The Nasdaq 100 fell 0.6% The Dow Jones Industrial Average rose 0.1% The MSCI World Index was little changed Bloomberg Magnificent 7 Total Return Index fell 0.5% Philadelphia Stock Exchange Semiconductor Index fell 0.7% IShares Expanded Tech-Software Sector ETF rose 0.4% The Russell 2000 Index fell 0.3% S&P 500 Equal Weighted Index rose 0.3% Currencies

The Bloomberg Dollar Spot Index was little changed The euro fell 0.2% to $1.1894 The British pound fell 0.4% to $1.3642 The Japanese yen rose 1% to 154.34 per dollar Cryptocurrencies

Bitcoin fell 2.1% to $68,900.63 Ether fell 5% to $2,016.01 Bonds

The yield on 10-year Treasuries declined six basis points to 4.14% 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 four basis points to 3.45% The yield on 30-year Treasuries declined eight basis points to 4.78% Commodities

West Texas Intermediate crude fell 0.1% to $64.29 a barrel Spot gold fell 0.6% to $5,028.32 an ounce ©2026 Bloomberg L.P.