U.S. stocks rebounded on Friday, recovering almost half of their losses from what was shaping up to be a challenging week.
The S&P 500 had its best performance since Election Day, surging by 1.4% and reducing its weekly loss to 1.7%. The Dow Jones Industrial Average and the Nasdaq composite also saw substantial increases, climbing 1.4%. This rally was driven by strong performances from major technology companies, including Nvidia, following a report indicating that a key inflation measure favored by the Federal Reserve was slightly lower than expected.
The recent inflation data provided hope amid concerns about rising prices, which have influenced the Federal Reserve's monetary policy decisions. Fed Chair Jerome Powell had previously warned that the central bank might implement fewer interest rate cuts next year than initially expected, which had a significant impact on the stock market. Traders had been assuming that the Fed would continue to lower rates, but the latest data has shifted expectations, with many now predicting one or two cuts, or potentially none at all. However, analysts noted that stock prices had become vulnerable after reaching all-time highs, and the recent inflation report prompted traders to reassess their expectations for interest rate cuts.
The political landscape in Washington also contributed to market volatility, as the House of Representatives rejected President-elect Donald Trump's proposal to keep the government fully operational. This raised concerns about the stability of governance, even with Republicans controlling both the House and Senate. The uncertainty surrounding Trump's policies, particularly his inclination towards tariffs and other measures that could lead to higher inflation and increased government debt, has contributed to a more cautious market outlook.
Despite the overall market rally, some stocks faced significant declines. U.S. Steel and Danish pharmaceutical company Novo Nordisk experienced drops in their stock prices, while Nike's stock slipped despite reporting better-than-expected profits. On the other hand, Eli Lilly's shares climbed following Novo Nordisk's disappointing update, and the cruise line sector enjoyed a boost, with Carnival Corporation and Norwegian Cruise Line exceeding profit expectations.
In the bond market, Treasury yields eased, reflecting a shift in investor sentiment as they navigate the complexities of inflation and interest rate expectations. Internationally, stock indexes across Asia and Europe experienced modest declines, indicating that global markets are also grappling with similar concerns regarding inflation and political uncertainty. The interconnectedness of global economies means that developments in the U.S. stock market and political landscape can have far-reaching implications for investors worldwide.