(Feb 11): Wall Street traders gearing up for the key jobs report drove a rally in Treasuries after weak retail sales bolstered the case for the Federal Reserve to lower interest rates this year. Still, those bets weren’t enough to lift the S&P 500 to fresh all-time highs. Bitcoin sank.
Ten-year yields dropped to the lowest in about a month, with money markets seeing slightly higher odds of three Fed cuts in 2026 — with two already fully priced in. About 300 shares in the US equity benchmark rose, but the gauge lost steam amid weakness in several tech names. A gauge of chipmakers dropped while an ETF tracking software firms trimmed most of its earlier surge.
After a strong advance, the S&P 500 entered a consolidation phase, reflecting a balance between optimism driven by corporate earnings and concerns over economic strength, according to Antonio Di Giacomo at XS.com.
US retail sales unexpectedly stalled in December, suggesting consumers provided less firepower for the economy as the year drew to a close.
“It appears that there was less momentum behind the consumer in the final months of 2025 than previously assumed — a less encouraging departure point for growth estimates in 2026,” said Vail Hartman at BMO Capital Markets.
This report “isn’t a disaster,” but it isn’t a constructive signal either, especially with lingering labour-market concerns and continued volatility across several asset classes, according to Bret Kenwell at eToro.
See also: US stock turnover tops US$1 tril a day amid trading surge
“Tomorrow’s jobs report will be key,” Kenwell said. “A weak print could push sentiment further toward risk-off if growth worries start to build, but a solid print may ease some of those concerns.”
Economists predict a 65,000 rise in January payrolls. Such an outcome would be the best in four months. The unemployment rate is seen holding at 4.4%. There will be an annual revision to the jobs count - which is expected to reveal a markdown in the year through March 2025.
The S&P 500 fell 0.3%. Both its equal-weighted version - which strips out market-value biases - and the Dow Jones Industrial Average closed at all-time highs. The Nasdaq 100 lost 0.6%. The yield on 10-year Treasuries slid six basis points to 4.14%. The dollar wavered. Bitcoin dropped below US$70,000.
See also: US stocks stall as investors digest sluggish retail sales data
The value of retail purchases, unadjusted for inflation, was little changed after a 0.6% gain in November. Excluding auto dealers and gasoline stations, sales were also flat. Control-group sales — which feed into the government’s calculation of goods spending for gross domestic product — fell 0.1% after a downwardly revised gain in the prior month.
With the weaker-than-expected core retail sales, fourth-quarter GDP estimates will get trimmed, said veteran Wall Street strategist Peter Boockvar.
“Consumer spending has finally caught up with consumer sentiment, and not in a good way,” said Chris Zaccarelli at Northlight Asset Management.
For months, consumers have been complaining about the cost of everything – and yet they kept spending, he said. However, the latest data show that consumers are no longer relentlessly doing that, he noted.
“To the extent that the labour market holds up and consumers see more cash in their pockets from all of the pro-cyclical measures, then the economy can keep growing,” Zaccarelli said. “But if this is a more permanent change in spending patterns then it could be the canary in the coalmine that signals a more serious slowdown.”
The weaker-than-expected retail sales data for December won’t be enough to spoil the fourth quarter, according to Thomas Ryan at Capital Economics.
“But together with the likely weakness of spending in January amid extreme winter weather in most of the country, it leaves consumption growth on track to slow sharply this quarter,” he said.
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Looming tax refunds and windfall gains in the stock market could rekindle retail sales and other consumer spending in coming months, according to Gary Schlossberg at Wells Fargo Investment Institute.
Swaps still imply policymakers will leave rates on hold when they meet next month, however, as they did in January when they voted to keep the target range for the federal funds rate at 3.5% to 3.75%.
Fed Bank of Cleveland President Beth Hammack said interest rates could be on an extended hold while officials evaluate incoming economic data. Her Dallas counterpart Lorie Logan said she’s hopeful inflation will continue to come down, though it would take “material” weakness in the labour market for her to support more rate cuts.
“We expect a further two rate cuts of 25 basis points from the Federal Reserve this year,” said Mark Haefele at UBS Global Wealth Management. “Solid economic growth, in part supported by productivity gains, is supporting corporate earnings.”
He maintains his June 2026 and December 2026 S&P 500 price targets of 7,300 and 7,700. The gauge closed at 6,941.81 on Tuesday.
Still, UBS Global Wealth Management downgraded the tech sector to neutral, citing a likely deceleration in hyperscaler capex growth, the fact that hardware valuations look full and that uncertainty could linger around software names.
“We recommend that investors maintain strategic exposure to broad technology, AI, and the US market as a whole,” Haefele said. “Moving the US IT sector to neutral is also not a negative view on technology as a whole, and it is important to recognise that there is more to the AI opportunity than this sector.”
Last week’s steep drop in software stocks on concern about competition from artificial intelligence (AI) was likely overdone and the US economy remains poised for strong growth this year, according to Goldman Sachs Group Inc’s chief executive officer.
“I think the narrative over the last week has been a little bit too broad,” David Solomon said on Tuesday at a UBS Group AG conference in Key Biscayne, Florida. “There’ll be winners and losers — plenty of companies will pivot and do just fine.”
Software stocks have the scope to rebound from their historic slide as the market is pricing in unrealistic near-term disruption from AI, according to JPMorgan Chase & Co strategists led by Dubravko Lakos-Bujas.
“Given the positioning flush, overly bearish outlook on AI disruption of software and solid fundamentals, we believe the balance of risks is increasingly skewed towards a rebound,” they said.
What we’ve recently seen was not a rejection of AI as a long-term investment theme, but a shift in what investors are willing to underwrite in the near term, according to Lauren Goodwin at New York Life Investments.
“Our conviction in the long-term AI investment case remains intact because hyperscalers are funding capex from profitable core franchise — and because demand for AI chips and infrastructure continues to outpace supply,” she said.
Despite near-term volatility, Goodwin remains constructive on the broader macro backdrop. A confluence of real-time market indicators suggests cyclical improvement is underway: copper prices have risen sharply, small caps and financials are outperforming, and market breadth is improving - all signals consistent with strengthening growth expectations, she said.
“We remain in a global bull market, with participation broadening both internationally and within the US — a constructive and healthy development,” said Keith Lerner at Truist Advisory Services. “Bull markets tend to be more durable when leadership expands.”
Much of the year-to-date action reflects rotation, Lerner noted. Areas that lagged last year, particularly cyclical and economically sensitive groups, have led as growth expectations have improved, while money rotated out of last year’s biggest winners in technology and AI, he added.
“While we are watching closely for any signs of technical deterioration, we continue to see merit in balancing cyclical exposure, including small- and mid-caps, alongside technology,” Lerner said.
The cross-currents facing the economy — AI disruption, restrictive monetary policy, late-cycle labour dynamics, and geopolitical uncertainty — reinforce the need for discipline in portfolio construction, noted Goodwin.
“Upcoming jobs and inflation data represent a critical crossroads for the Fed — and for near-term market sentiment,” she concluded. “Markets are searching for confirmation that growth is slowing just enough to justify further policy easing, but not so much to risk breaking.”
A survey conducted by 22V Research showed that 42% of investors bet Wednesday’s jobs data will be “risk on,” 37% said “mixed/negligible” and 21% “risk off.” The tally also underscored a shift in investors’ focus to payrolls as the most-important labour indicator to watch.
“Investor estimates of payrolls based on their expectations for the market reaction indicate investors think strong data will be ‘mixed/negligible’,” said Dennis DeBusschere at 22V.
JPMorgan strategists including Bram Kaplan note that the S&P 500 options market is generally underpricing upcoming data releases compared to historical swings after these events.
That’s especially the case for Wednesday’s US non-farm payrolls, where past moves were nearly double what is currently being priced. Next-month options are also pricing in a modest move for the following report.
The Fed chose to hold interest rates steady in January given signs of stabilisation in the labour market and inflation that’s still elevated. Fed governors Christopher Waller and Stephen Miran both dissented in favour of another rate cut.
In Friday’s consumer pridex index, economists will look for more evidence that inflation is on a downward trend after previous reports were complicated by last year’s record-long government shutdown.
Meantime, equity markets are moving more money than ever before, blowing past US$1 trillion in shares traded each day as heavy volume becomes the new norm. The jump reflects a broad-based increase in participation across the market.
The surge marks a sharp step-up from a year ago. Equity turnover averaged a record US$1.03 trillion in January, a roughly 50% increase from the same period in 2025, according to data compiled by Bloomberg Intelligence. More than 19 billion shares traded hands daily over the span, the second-most ever, the data show.
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