Stocks Settle Mixed on Sector Rotation

The S&P 500 Index ($SPX) (SPY) on Thursday closed up +0.01%, the Dow Jones Industrials Index ($DOWI) (DIA) closed up +0.55%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed down -0.57%.  March E-mini S&P futures (ESH26) rose +0.01%, and March E-mini Nasdaq futures (NQH26) fell -0.57%.

Stock indexes settled mixed on Thursday, as the broader market was pressured by weakness in chipmakers, data storage companies, and software makers.  There was also a rotation out of AI-related and megacap technology stocks into small caps, keeping the overall market mixed. 

Higher bond yields on Thursday were another negative factor for stocks.  Yields rose after announced layoffs at US companies dropped to a 17-month low in December, and weekly jobless claims rose less than expected, signs of labor market strength that are hawkish for Fed policy.  The 10-year T-note yield rose +3 bp to 4.18%. 

However, losses in stock indexes were contained as defense stocks rallied after President Trump signaled plans to ramp up military spending to $1.5 trillion next year.  Also, energy producers moved higher after WTI crude oil rose by more than +3%.

Stocks found some support on Thursday’s better-than-expected US economic news, which showed that Q3 nonfarm productivity increased, Q3 unit labor costs fell more than expected, and the Oct trade deficit shrank to a 16-year low.

US Dec Challenger job cuts fell -8.3% y/y to 35,553, a 17-month low and a supportive factor for the US labor market.

US weekly initial unemployment claims rose by +8,000 to 208,000, showing a stronger labor market than expectations of 212,000.

US Q3 nonfarm productivity rose by +4.9%, close to expectations of +5.0% and the biggest increase in 2 years.  Q3 unit labor costs fell by -1.9%, a bigger decline than expectations of -0.1%.

The US Oct trade deficit unexpectedly shrank to -$29.4 billion, better than expectations of widening to -$58.7 billion and the smallest deficit in 16 years.

The market’s focus this week will be on US economic news.  On Friday, Dec nonfarm payrolls are expected to increase by +70,000, and the Dec unemployment rate is expected to slip by -0.1 to 4.5%.  Also, Dec average hourly earnings are expected to be up by 0.3% m/m and 3.6% y/y. In addition, Oct housing starts are expected to increase by 1.8% m/m to 1.33 million, and Oct building permits are expected to rise by 1.5% m/m to 1.35 million.  Finally, the University of Michigan's Jan consumer sentiment index is expected to climb by +0.6 points to 53.5. 

The markets are discounting the odds at 12% for a -25 bp rate cut at the FOMC’s next meeting on January 27-28.

Overseas stock markets settled lower on Thursday.  The Euro Stoxx 50 closed down -0.32%.  China’s Shanghai Composite closed down -0.07%.  Japan’s Nikkei Stock 225 closed down -1.63%.

Interest Rates

March 10-year T-notes (ZNH6) on Thursday closed down by -10.5 ticks.  The 10-year T-note yield rose +3.5 bp to 4.183%.  T-notes came under pressure Thursday after Dec Challenger job cuts fell to a 17-month low and weekly jobless claims rose less than expected, both positive for the US labor market and hawkish for Fed policy.  In addition, a deluge of corporate supply has prompted bond dealers to enter short positions in 10-year T-note futures to hedge against the incoming supply, weighing on prices.  There have been $88.4 billion in corporate bond sales so far this week.  Losses in T-notes were limited after Q3 unit labor costs fell more than expected, a sign of easing wage pressures that are dovish for Fed policy. 

European government bond yields were mixed on Thursday.  The 10-year German bund yield rose +5.1 bp to 2.863%.  The 10-year UK gilt yield fell -1.2 bp to 4.404%.

The Eurozone Dec economic confidence indicator unexpectedly fell -0.4 to 96.7, weaker than expectations of an increase to 97.1. 

The Eurozone Nov unemployment rate unexpectedly fell -0.1 to 6.3%, showing a stronger labor market than expectations of no change at 6.4%.

Eurozone Nov PPI fell -1.7% y/y, right on expectations and the biggest decline in thirteen months.

The ECB's Nov 1-year inflation expectations were unchanged from Oct at 2.8%, stronger than the 2.7% expected.  The Nov 3-year inflation expectations remained unchanged from Oct at 2.5%, right on expectations.

German Nov factory orders unexpectedly rose +5.6% m/m, stronger than expectations of -1.0% m/m and the biggest increase in 11 months.

ECB Vice President Luis de Guindos said, "The current level of ECB interest rates is appropriate; the latest data are aligning perfectly with our projections.  Headline inflation is at 2%, and services inflation, which was our concern, is slowing."

Swaps are discounting a 1% chance of a +25 bp rate hike by the ECB at its next policy meeting on February 5.

US Stock Movers

Chip makers and data storage companies retreated on Thursday, weighing on the broader market.  Seagate Technology Holdings (STX) closed down by more than -7% to lead losers in the S&P 500 and Nasdaq 100. Also, Western Digital (WDC) closed down by more than -6%, and Sandisk (SNDK) closed down by more than -5%.  In addition, Micron Technology (MU), Intel (INTC), Applied Materials (AMAT), and Broadcom (AVGO) closed down more than -3%, and Advanced Micro Devices (AMD), ARM Holdings Plc (ARM), ASML Holding NV (ASML), and KLA Corp (KLAC) closed down more than -2%. 

Software stocks slid on Thursday, weighing on the overall market.  Datadog (DDOG) closed down more than -7%, and Autodesk (ADSK) closed down more than -5%.  Also, Salesforce (CRM) closed down more than -2%, and Oracle (ORCL) and Microsoft (MSFT) closed down more than -1%. 

Defense stocks rallied sharply on Thursday after President Trump said he wants to increase the US military budget by about 50% to $1.5 trillion in 2027. As a result, AeroVironment (AVAV) closed up more than +8%, and Huntington Ingalls Industries (HII) closed up more than +6%.  Also, L3Harris Technologies (LHX) closed up more than +5%, and Lockheed Martin (LMT) closed up more than +4%.  In addition, Northrop Grumman (NOC) closed up more than +2%, and General Dynamics (GD) and RTX Corp (RTX) closed up more than +1%. 

Energy producers and energy service providers rallied Thursday as WTI crude rose more than +3%. As a result, APA Corp (APA) closed up more than +8% to lead gainers in the S&P 500, and Diamondback Energy (FANG) closed up more than +5% to lead gainers in the Nasdaq 100.  Also, Halliburton (HAL), Occidental Petroleum (OXY), and ConocoPhillips (COP) closed up more than +5%.  In addition, Devon Energy (DVN), Phillips 66 (PSX), and Valero Energy (VLO) closed up more than +4%, and Exxon Mobil (XOM) closed up more than +3%.

Omnicell Inc (OMCL) closed up more than +6% after KeyBanc Capital Markets upgraded the stock to overweight from sector weight with a price target of $60.

Constellation Brands (STZ) closed up more than +5% after reporting Q3 comparable net sales rose by $2.22 billion, above the consensus of $2.16 billion.

Generac Holdings (GNRC) closed up more than +5% after Citibank upgraded the stock to buy from neutral with a price target of $207. 

Globus Medical (GMED) closed up more than +4% after forecasting full-year adjusted EPS of $4.30 to $4.40, stronger than the consensus of $4.12. 

Costco Wholesale (COST) closed up more than +3% after reporting that Dec comparable sales ex-gas rose 6.3%, beating the consensus of 4.4%.

Steve Madden Ltd (SHOO) closed up more than +3% after Needham & Co upgraded the stock to buy from hold with a price target of $50.

AbbVie (ABBV) closed down more than -3% after Wolfe Research LLC downgraded the stock to peer perform from outperform. 

Alcoa (AA) closed down more than -2% after JPMorgan Chase downgraded the stock to underweight from neutral with a price target of $50.

DoorDash (DASH) closed down more than -2% after Bloomberg Second Measure said the company’s Q4 adjusted observed sales rose +25% y/y, below the consensus of +39% y/y.

Earnings Reports(1/9/2026)

None.