Tuesday offered a strong reminder that inflation may not be done wreaking havoc across the economy and capital markets. Stocks sold off in the previous session, with the S & P 500 shedding 1.1%, after data from the Institute for Supply Management pointed to stickier price pressures. The price component of the ISM purchasing managers’ services index jumped 6.2 points to 64.4. The data drove Treasury yields higher, with the benchmark 10-year note yield reaching levels not seen since last April. The data and subsequent selloff in bonds left many investors wondering if the Federal Reserve will be able to cut interest rates as much as anticipated in 2025. “Fed funds futures pushed back the likely timing of the next rate cut, with the probability of another cut by the March meeting falling from 44% on Monday to 41% by the close,” Deutsche Bank strategist Jim Reid wrote. “And looking further out, the total amount of cuts priced by December’s meeting came down -1.6 [basis points] on the day to 37.5bps,” Still, many on Wall Street remain optimistic about the path ahead for stocks, at least for the time being. “Increased sensitivity to rising bond yields and short-term oversold conditions are testing investors’ patience and nerves as they await this week’s FOMC minutes and jobs report,” Piper Sandler chief market technician Craig Johnson wrote. “Despite the increased caution, we remain optimistic as the major indices’ primary uptrends remain well-intact.” Johnson maintained his year-end S & P 500 target of 6,600. Barclays’ Emmanuel Cau, head of head of European equity strategy, also noted that while the current market choppiness may persist, “the key drivers of the bull market, i.e. resilient earnings and growth-focused central banks, remain broadly in place for equities to climb the wall of worry.” Solita Marcelli, chief investment officer for the Americas at UBS, also had a more sanguine view of the latest services data. “Markets took these data points as an indication of a resilient labor market and inflationary pressures within the service sector, and further scaled back expectations for how much the Federal Reserve will lower rates this year,” Marcelli said. “But while risk sentiment is likely to remain fragile, we continue to see a favorable macro backdrop for equities and bonds, and believe that market fundamentals should benefit these asset classes.” But if Friday’s crucial December jobs report also points to more inflationary pressures, don’t expect the market to step so lightly. Elsewhere Wednesday on Wall Street , AMD was downgraded by HSBC to reduce from buy, citing strong competition in artificial intelligence from other chipmakers. “We see additional downside as we now believe its AI GPU roadmap is less competitive than we previously thought,” analyst Frank Lee wrote. “Hence, we believe AMD wouldn’t be able to penetrate the AI GPU market as much as we had earlier anticipated.”
Stocks are still in a good place — for now