All three major U.S. stock indexes closed in negative territory, dragged lower by financials and tech , with the small-cap Russell 2000 underperforming its larger-cap counterparts.
Chips advanced, indicating the artificial intelligence fervor is alive and well. Still, most of the Magnificent Seven group of AI-related megacaps were lower.
“The AI names are trading on their own completely separate world, largely oblivious to macro and geopolitical risk, at least within reason,” said Ross Mayfield, investment strategy analyst at Baird in Louisville, Kentucky. “And so there’s going to be a bid for those names, especially on days where everything else looks a little bit less attractive.”
The S&P Software & Services index declined. It has been battered in recent months by fears of AI disruption.
Middle East hostilities intensified as the U.S. and Iran traded a new round of air strikes, the latest test of a shaky ceasefire.
Oil prices rose, adding to worries that upward pressure on energy prices could metastasize into broader, systemic inflation.”This market continues to demonstrate a tug of war between fundamentals in the U.S. economy, which are incredibly positive, and concerns that the duration of the conflict in the Middle East will lead to downside risks,” said Bill Northey, senior investment director at U.S. Bank Wealth Management, Billings, Montana. “Our framework is centered around the duration of the closure of the Strait of Hormuz as the primary input to inflation expectations.”
“The longer the duration of that closure, the less likely the Federal Reserve will be able to ease in 2026,” Northey added.
In fact, financial markets are pricing more than a 40% likelihood of a rate hike at the conclusion of the U.S. Federal Reserve’s December meeting, up from 9.1% one month ago, according to CME’s FedWatch tool.
New York Fed President John Williams reiterated his position that the central bank does not need to change interest rates despite upside inflation risks, stating monetary policy is “in the right place.”
Economic data suggested the labor market was stable, and the services sector continued to expand, but input prices remained elevated and corporate spending plans appeared soft amid rising energy costs and geopolitical uncertainties.
The Beige Book, the Fed’s regional economic survey, showed economic activity gathered steam in recent weeks, employment was little changed, but the fallout from higher energy prices due to the war was pervasive.
According to preliminary data, the S&P 500 lost 54.11 points, or 0.74%, to end at 7,555.67 points, while the Nasdaq Composite lost 230.97 points, or 0.85%, to 26,862.93. The Dow Jones Industrial Average fell 581.84 points, or 1.13%, to 50,725.95.
Among chipmakers, Marvell, Intel, Qualcomm , and Sandisk outperformed.
Asset managers dropped after Switzerland’s Partners Group capped withdrawals from an $8.6 billion private equity fund. KKR, Blackstone, Blue Owl and Ares Management all lost ground.
GameStop advanced after the original meme-stock posted a rise in quarterly revenue and unveiled a $2 billion share buyback program.
Elon Musk’s SpaceX plans to price its IPO at $135 a share to raise a record $75 billion, a source familiar with the matter told Reuters on Tuesday.
Broadcom results were expected shortly.
