US Market Falters Amid Federal Reserve's Cautious Stance on Rate Cuts

The US market retreated on Tuesday as investors digested conflicting signals about the Federal Reserve’s future policy direction. While economic data suggesting softer consumer demand initially supported a case for interest rate cuts, hawkish comments from Fed officials quickly reversed market optimism and pushed stocks into uncertain territory.

Mixed Signals Weigh on Stock Indexes

The US market’s performance reflected this tug-of-war between optimism and caution. The S&P 500 fell 0.33%, the Nasdaq 100 dropped 0.56%, and futures markets signaled continued pressure with March E-mini S&P futures declining 0.30% and March E-mini Nasdaq futures falling 0.50%. The Dow Jones Industrials managed a slight gain of 0.10%, reaching a new all-time high despite broader weakness.

Early in the session, stocks climbed as investors welcomed weaker-than-expected retail sales data and a softer employment cost index report. These economic indicators typically suggest the Federal Reserve might accelerate interest rate cuts later this year. The 10-year Treasury yield fell to a 3.5-week low of 4.13%, reflecting reduced bond yields and increased demand for safer assets.

However, the rally evaporated as Fed officials spoke. Cleveland Federal Reserve President Beth Hammack stated she preferred patience in adjusting rates rather than “fine-tuning the funds rate,” noting the Fed could remain on hold “for quite some time.” Dallas Fed President Lorie Logan added that only “material” weakness in the labor market would convince her to support additional cuts. These comments shifted market expectations toward a more prolonged period of rate stability.

Bond Yields Fall on Soft Economic Data

December retail sales came in flat month-over-month, disappointing forecasts for a 0.4% increase and signaling potential weakness in consumer spending. Retail sales excluding automobiles also stagnated when economists had expected growth. The Q4 employment cost index rose only 0.7% quarter-over-quarter, below the expected 0.8% and marking the smallest quarterly increase in 4.5 years.

While these numbers might seem dovish for the US market, suggesting economic softness, they also fueled concerns about Q4 GDP growth and overall economic momentum. The 10-year Treasury yield ultimately fell 6.1 basis points to 4.141%, providing some support to bond markets and reinvigorating demand for fixed-income assets.

Treasury markets showed strength throughout the session. The Treasury’s $58 billion auction of 3-year notes attracted robust demand, with a bid-to-cover ratio of 2.62, slightly above the 10-auction average. European government bonds also moved lower, as the 10-year German bund yield fell to a 1-month low of 2.800% and the 10-year UK gilt yield dropped to 2.485%.

AI Disruption Fears Hit Wealth Advisors

Sector-specific weakness emerged as certain industry groups struggled while others surged. AI-infrastructure stocks faced significant selling pressure, with Western Digital collapsing more than 7% to lead declines in the Nasdaq 100. Seagate Technology and Intel both fell more than 6%, while Micron Technology, Advanced Micro Devices, ASML, Broadcom, and Lam Research each retreated more than 1%.

The most notable decline came in wealth management and financial advisory stocks. Altruist Corp’s announcement of an AI tool designed to help financial advisers personalize client strategies and generate documents sparked fears that artificial intelligence could disintermediate the traditional financial advisory model. Raymond James Financial and LPL Financial Holdings both plunged more than 8%, Charles Schwab fell more than 7%, and Stifel Financial declined more than 4%.

Homebuilding stocks and building suppliers moved in the opposite direction, gaining 3% to 6% as the decline in Treasury yields reduced mortgage rates and enhanced housing affordability. Toll Brothers surged more than 6%, D.R. Horton and KB Home gained more than 5% each, while Lennar, PulteGroup, and Builders FirstSource each advanced more than 3%.

Winners and Losers in Latest Trading Session

Individual stock movements revealed the divergent forces shaping the US market. On the downside, Goodyear Tire & Rubber reported Q4 adjusted earnings of 39 cents per share, falling short of the 49-cent consensus and triggering a 14% decline. S&P Global plunged 9% after forecasting full-year adjusted earnings of $19.40 to $19.65, below Wall Street’s $20.00 target. Incyte fell 8% after guiding full-year revenue to $4.77 billion to $4.94 billion, with a midpoint below expectations. Xylem dropped 7% following a 2026 revenue forecast of $9.1 billion to $9.2 billion, below consensus estimates of $9.33 billion.

Conversely, several companies delivered surprise earnings or upside guidance, energizing the US market’s earning season. Spotify surged 17% after reporting a record 38 million monthly active users in Q4, crushing the 32-million consensus. Datadog rallied 15% to lead gainers in both the S&P 500 and Nasdaq 100 after reporting Q4 revenue of $953.2 million, beating the $917.2-million expectation. Ichor Holdings jumped 34% following a Q1 adjusted earnings guidance of 8 cents to 16 cents, well above the 6.1-cent consensus. Credo Technology Group surged 10% after forecasting preliminary Q3 revenue of $404 million to $408 million, significantly outpacing the $341.2-million estimate.

Additional gainers included Masco, up 9% after raising full-year adjusted earnings guidance to $4.10 to $4.30; Marriott International, up 8% following 2026 adjusted earnings guidance of $11.32 to $11.57; and Shopify, up 8% after receiving an analyst upgrade and $250 price target. Cintas climbed 2% after Bloomberg reported that UniFirst Corporation is in active discussions regarding an acquisition.

Earnings Season Momentum Continues

Earnings season in the US market remains a defining factor supporting stock valuations. More than half of S&P 500 companies have now reported quarterly results, with 78% of the 319 companies that have reported beating Wall Street expectations. Bloomberg Intelligence projects S&P 500 earnings will grow 8.4% in Q4, marking the tenth consecutive quarter of year-over-year expansion. Excluding the Magnificent Seven megacap technology stocks, Q4 earnings are forecast to increase 4.6%, reflecting broadbased strength beyond the mega-cap cohort.

What’s Next for the US Market

Upcoming economic data will heavily influence market direction this week. The market is currently pricing in only a 23% probability of a 25-basis-point rate cut at the Federal Reserve’s March 17-18 policy meeting. Initial weekly unemployment claims are expected to fall by 7,000 to 224,000 on Thursday, while January existing home sales are anticipated to decline 4.3% to 4.16 million. Friday’s inflation data will be closely watched, with January CPI expected to rise 2.5% year-over-year.

Overnight, international markets sent mixed signals. China’s Shanghai Composite gained 0.13% and rose to a 1-week high, while Japan’s Nikkei 225 rallied to an all-time high, surging 2.28%. The Euro Stoxx 50 retreated 0.20% from record levels, with ECB officials maintaining that current interest rates remain appropriate for the Eurozone.

The US market will continue balancing competing narratives: the support from softer economic data and lower bond yields against the headwinds from Fed caution and concerns about economic momentum. With earnings season momentum supporting valuations and earnings growth continuing to expand, investors will be watching whether the Fed’s measured approach allows equities to maintain their upward trajectory.