After closing out a second consecutive year of remarkable returns in 2024 with the S&P 500 posting a total return of 25%, the U.S. stock market kicked off the new year on a turbulent note in last week’s holiday-shortened trading. Trading volumes were lighter due to the holiday season, which often can create more volatile swings in prices as we saw last week. The major indices—such as the S&P 500, Dow Jones Industrial Average, and Nasdaq Composite—sold off sharply in the final two days of 2024, but managed to rally in part in the second half of the week to start 2025.

The tech-heavy Nasdaq, which returned just shy of 30% in 2024, experienced the most volatility last week as higher-growth companies showed signs of underperformance. Following a tremendous bull run in technology stocks over the last two years fueled by enthusiasm around artificial intelligence, the recent rise in long-term interest rates has given investors some pause on the forward outlook for tech stocks amid extended valuations. Fueled by rising growth and inflation expectations and increased attention on the government debt burden, the U.S. 10-year Treasury yield has surged up to 4.60% compared to 4.20% at the start of December and the September low of 3.60%.

Additionally, the Federal Reserve’s hawkish stance from previous meetings has further stoked the rise in rates as Fed officials signal caution in loosening policy too early. The central bank has dialed back rate cut expectations and now only anticipates 1-2 quarter point rate cuts in total in 2025, which is in-line with what is priced in by market participants. The back-up in bond yields has been a headwind to bond investors as it has weighed on bond prices, but the compelling yields are drawing in income-focused investors, particularly given such a robust run for equity markets.

Looking ahead, this week will likely be shaped by key economic reports and corporate earnings that could provide further insights into the trajectory of both the economy and monetary policy. The jobs report will be closely watched as it provides critical insight into the labor market.

Although it’s early in the earnings season, investors will begin to hear from some key corporations, particularly in sectors like technology, finance, and consumer goods. The market will be watching for any signs of profit margins being squeezed as companies manage elevated input and labor costs. Additionally, inflationary pressures on consumer goods remain a concern, and any signals from retail chains about pricing trends could influence market expectations about future inflation.