Economic Reports Fuel Market Worries

The stock market pullback came after a series of economic reports that painted a bleak picture of the U.S. economy. One report suggested that business activity in the U.S. is nearing stall-speed, with growth decelerating to a 17-month low. The preliminary report from S&P Global indicated that activity for U.S. services businesses unexpectedly shrank, and many businesses reported a slump in optimism due to worries about Washington.

“Companies report widespread concerns about the impact of federal government policies, ranging from spending cuts to tariffs and geopolitical developments,” said Chris Williamson, chief business economist at S&P Global Market Intelligence. “Sales are reportedly being hit by the uncertainty caused by the changing political landscape, and prices are rising amid tariff-related price hikes from suppliers.”

Chris Williamson, Chief Business Economist, S&P Global Market Intelligence

A separate report indicated that U.S. consumers are bracing for higher inflation, partly due to potential tariffs. According to a survey by the University of Michigan, consumers expect prices to be 4.3% higher 12 months from now, a significant jump from last month’s forecast of 3.3% inflation. This aligns with preliminary data suggesting economic uncertainty and potential tariffs could drive inflation.

Expectations for inflation are rising for political independents and Democrats, while falling slightly for Republicans. This divide reflects the polarized views on economic policies and their potential impact on inflation.

Housing Market Struggles

A third economic report highlighted that sales of previously occupied homes were weaker than expected last month. High mortgage rates have been a significant hurdle for the housing market, making it difficult for potential buyers to afford homes.

Despite these challenges, the U.S. stock market remains up for the young year so far and is close to its all-time high set earlier this week. However, the recent reports raise concerns about the resilience of the economy, leading to widespread losses on Wall Street. Stocks of the smallest companies, whose profits are closely tied to the strength of the U.S. economy, fell more than the rest of the market. The Russell 2000 dropped a market-leading 2.7%.

Broad Market Decline

Even within the big companies of the S&P 500 index, roughly 4 out of every 5 stocks fell. Everything from Big Tech stocks, which have been boosted by the artificial-intelligence frenzy, to airlines and metals companies saw declines. Nvidia sank 2.5%, United Airlines lost 5.5%, and Newmont Mining fell 4.4%.

Akamai Technologies had the sharpest drop in the S&P 500, losing a fifth of its value and falling 20.6% as investors focused on its forecasts for revenue and other financial measures this upcoming year, which fell short of analysts’ expectations.

Winning Stocks

On the winning side of Wall Street was Celsius Holdings, which sells “better-for-you” energy drinks. It leaped 29.5% after announcing it agreed to buy Alani Nu, a beverage company that focuses on female customers. Analysts called the purchase price, $1.65 billion net of tax effects, reasonable and said the deal should quickly add to profits for Celsius, which also reported its latest quarterly results.

Other winners included stocks of companies that can provide steadier profits regardless of what the U.S. economy is doing. Water utility American Water Works rose 3%, for example.

Fed’s Role in Market Stability

Before Friday’s sharp drop, the S&P 500 had been heading for a week of almost zero movement. Helping to lift stocks had been a steady parade of better-than-expected profit reports. That worked against worries about stubbornly high inflation which could prevent the Federal Reserve from delivering more relief for the economy and financial markets through lower interest rates.

The Fed has been holding its main interest rate steady after steadily cutting it through the end of last year. Minutes from the Fed’s last policy meeting, which were released earlier this week, suggested officials may stay on hold for a while given worries about how Trump’s proposed tariffs and mass deportations of migrants, along with other factors, could push upward on inflation.

Federal Reserve Minutes

While lower rates can boost the economy, they can also encourage spending that puts upward pressure on inflation. Treasury yields eased in the bond market following Friday’s weaker-than-expected economic reports. The yield on the 10-year Treasury sank to 4.41% from 4.51% late Thursday. The two-year Treasury yield, which more closely tracks expectations for upcoming Fed action, fell to 4.19% from 4.27%.

Global Market Reactions

In stock markets abroad, indexes were mixed in Europe after rising across much of Asia. In Japan, the Nikkei 225 edged up 0.3% after the government said a key measure of inflation remained above the Bank of Japan’s target level last month. That could encourage it to keep raising interest rates. Last month, the Bank of Japan raised its key policy rate to about 0.50% from 0.25%.

Hong Kong’s Hang Seng jumped 4% for one of the world’s largest moves, boosted by a surge for e-commerce firm Alibaba, which reported stronger profit for the end of last year than expected. It also talked up its artificial-intelligence developments.