It’s a risk-off day.
Despite a very strong earnings season – 70% of the companies in the S&P 500 have reported, operating profit is up 19% y-o-y, the 11th straight quarter positive quarter and highest growth rate since Q4 2021 – the S&P is now down 2% in a week, the -2.7%, the -1.9%. It started with the caution regarding further rate cuts, followed by concerns about the high valuations of AI names, and has been compounded by the extended government shutdown, and now the legal challenge to the Trump tariffs.
Today, we’re seeing a significant drop in interest rates. The US 2-year is down 6 bps to 3.57%, the is down 7 bps to 4.09%. Still well above the yields before the October Fed cut, and may be more of a reaction to the volatility of the equity markets than a reassessment of the Fed’s posturing. It has improved the bets for a December Fed cut, now above 65% from yesterday’s below 60%. Bets for follow-through cuts early ’26 are also incrementally higher.
The downdraft today is across the board, with commodities lower, the lower, and crypto lower, following equities going to lows after an attempted bounce. The closed yesterday at 18 and was falling lower into the open then shot straight up to 19.3, pulled back to 18.6, and is now motoring higher towards 20. Dip buyers, who showed up late yesterday morning, are on the sidelines so far. For the trailing month, only tech (+3.6%), consumer discretionary (+1.3%), and healthcare (+0.6%) are now in the green.
There’s still hope for a year-end rally once the government shutdown ends and the tariff situation is resolved. We are still two weeks from the very important earnings, and strength there might be the catalyst to reaffirm the AI narrative. If that is followed by a December Fed cut, we may still go out on a high at year’s end. Keeping things in perspective, the S&P is still 2.8% above the October 10th low, and up 14.5% YTD, + 13.6% LTM. Corrections with these levels of gains are normal and to be expected, not something to panic over.