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Introduction
Wall Street closed the week on a sour note as the postelection rally showed signs of slowing. Investor concerns shifted toward the Federal Reserve’s stance on interest rates and cautious corporate earnings guidance, leading to sharp declines across major indices.
Weekly Market Overview
The Dow Jones Industrial Average dropped 305.87 points, or 0.7%, to 43,444.99. The S&P 500 fell 1.32%, ending at 5,870.62, while the Nasdaq Composite led the losses with a 2.24% decline to close at 18,680.12. For the week, the S&P 500 lost 2.1%, the Nasdaq fell 3.2%, and the Dow was down 1.2%.
Powell’s Speech: A Dovish Shift or Staying Cautious?
Fed Chair Jerome Powell reiterated that the Federal Reserve remains cautious about lowering rates despite robust economic growth. Boston Fed President Susan Collins echoed similar sentiments, signaling that a December rate cut remains uncertain. "While the macro environment remains supportive of risk assets, short-term volatility is likely as markets adjust to potential policy changes under the new administration," said Kristy Akullian, Head of iShares Investment Strategy at BlackRock.
Market Reactions: Pharma and Tech Stocks Drag the Market
Declines in pharmaceutical stocks weighed heavily on the Dow and S&P 500. Amgen fell 4.2%, and Moderna tumbled 7.3%, with concerns surrounding President-elect Donald Trump’s potential nomination of vaccine skeptic Robert F. Kennedy Jr. to lead the Department of Health and Human Services.
The tech sector was the biggest laggard in the S&P 500. Nvidia, Meta Platforms, Alphabet, and Microsoft saw significant declines, while Tesla stood out with a 3% gain, benefitting from investor interest tied to the "Trump Trade."
Expert Opinions on Valuations and Earnings Momentum
Corporate earnings revealed cracks despite growing for the fifth consecutive quarter at 5.4%. FactSet reported that only 75% of S&P 500 companies beat earnings estimates—below the five-year average of 77%—and average beats came in at 4.3%, significantly lower than the usual 8.5%.
"Valuations remain elevated," said John Butters, Senior Earnings Analyst at FactSet. "The forward P/E ratio for the S&P 500 stands at 22.0, well above the five-year average of 19.6."
Sector Highlights: Airlines Face Diverging Fortunes
Goldman Sachs resumed coverage of the airline sector, issuing "buy" ratings for Alaska Air Group, Delta Air Lines, and United Airlines, citing strong corporate travel demand. Conversely, JetBlue Airways and Southwest Airlines received "sell" ratings due to challenges in maintaining profitability amid competitive pressures.
Outlook for Small-Cap Stocks
Small-cap stocks, which rallied 8% last week, saw a sharp reversal, with the Russell 2000 falling 4% this week. Despite the pullback, small caps remain up nearly 5% in November and are on track for a yearly gain of over 13%. Analysts continue to highlight deregulation under the Trump administration as a potential long-term tailwind for smaller firms.
Conclusion
As the postelection rally slows, investors face a delicate balancing act between optimism for pro-business policies under the new administration and concerns over elevated valuations and slowing earnings momentum. With the Federal Reserve’s December decision approaching, markets are bracing for continued volatility.
Stay tuned for next week’s issue, where we’ll analyze the Fed’s rate decision and its potential impact on market performance in 2024.