US Stocks Retreat From Record Highs as Economic Concerns Mount
The S&P 500 index registered a weekly decline, stepping back from its recent record high as technology stocks led a market pullback and concerning labor market data came into focus. The benchmark index concluded Friday with losses after three consecutive weeks of gains, now trading approximately 2.4% below its all-time closing peak reached on October 28.
This market retreat occurred despite what has been generally considered a strong third-quarter earnings season for major American corporations. Investor concerns about elevated stock valuations, particularly for high-flying artificial intelligence-related stocks, intensified following disappointing employment figures that revealed significant layoff announcements by US employers.
Technology Sector Bears the Brunt of Market Decline
The technology sector, which has been driving the bull market for over three years, experienced the most substantial impact during this recent downturn. The S&P 500 technology segment has declined by approximately 6% since last week, reflecting growing investor caution about stretched valuations in the sector that has been at the forefront of AI enthusiasm.
Anthony Saglimbene, chief market strategist at Ameriprise Financial, commented on the current market sentiment. "At current valuations and the kind of gains that we've seen... investors are just starting to be a little bit more cautious. I don't think that is bad, but it is coming at a time where there is growing uncertainty around the pace of growth in the economy."
Market participants are carefully assessing whether this equity pullback represents healthy profit-taking after an extended rally or signals the beginning of a more significant downturn. The benchmark S&P 500 remains up 14% year-to-date and has gained 35% since its April low, fueling concerns about a potential "AI bubble" that has kept Wall Street investors on edge.
Labor Market Data Raises Red Flags
A series of employment reports released on Thursday indicated deteriorating conditions in the US labor market. Workforce analytics firm Revelio Labs disclosed that 9,100 jobs were eliminated in October, while global outplacement company Challenger, Gray & Christmas reported that planned layoffs by US employers surged to over 153,000 last month.
The Chicago Federal Reserve estimated that the US unemployment rate likely increased in October to its highest level in four years. This data emerged one day after the ADP National Employment Report showed private sector employment rebounded by 42,000 jobs in October.
Peter Cardillo, chief market economist at Spartan Capital Securities in New York, expressed concern about the conflicting signals. "The Challenger layoffs report, combined with the lack of government jobs data, raises a red flag in terms of whether or not the labor market has really stabilized."
The ongoing federal government shutdown that began on October 1 has limited the availability of official economic data, making alternative data from private sector organizations increasingly important for investors seeking to gauge economic health.
Federal Reserve Faces Data Dilemma
The absence of government economic reports is complicating the Federal Reserve's decision-making process as it contemplates whether to implement another interest rate cut at its December policy meeting. Following the central bank's second consecutive quarter-percentage-point rate reduction on October 29, Fed Chair Jerome Powell indicated that another cut was not predetermined.
Chuck Carlson, CEO at Horizon Investment Services, highlighted the Fed's predicament. "The Fed needs help trying to figure out what's going on in the jobs market. They're getting seemingly conflicting signals and what they decide to do in December has ramifications obviously for the stock market."
As of Friday, fed funds futures were pricing in approximately a 65% probability of a rate cut in December. Before Powell's recent comments, investors had largely assumed such a reduction was virtually certain.
Meanwhile, the earnings season continues to demonstrate corporate strength. According to LSEG IBES data released on Friday, with 446 S&P 500 companies having reported results, 82.5% exceeded analyst profit expectations, marking the highest beat rate since the second quarter of 2021.
Investors are now looking ahead to quarterly reports from Walt Disney and Cisco Systems next week, followed by semiconductor giant Nvidia the subsequent week. Nvidia, now the world's largest company by market value, has come to symbolize investor enthusiasm for artificial intelligence technology.
Saglimbene noted, "I would just expect a little bit more volatility around technology leaders and technology as a whole heading into that Nvidia report."
Attention also remains focused on developments that might signal an end to the government shutdown, which this week became the longest in US history. The transportation secretary warned on Friday that the government might compel airlines to reduce flights by up to 20% if the shutdown persists.
