Is there still a Santa Claus rally? Understand why US stocks plummeted on Friday in one article

December 27 is the last Friday trading day of 2024. Although market participants are eagerly anticipating the arrival of the "Santa Claus rally," contrary to expectations, U.S. stocks accelerated their decline in the early trading session on Friday, with large technology stocks—this month's market favorites—leading the drop.

After an hour and a half of trading, U.S. stocks collectively traded near their daily lows, with the S&P 500 index's decline expanding to 1.4%. The Dow Jones Industrial Average fell for the first time in six trading days, dropping over 420 points or about 1%. The tech-heavy Nasdaq fell about 2%, with the semiconductor index dropping as much as 2.3%.

Large technology stocks led the decline on Friday, with Tesla briefly dropping over 6%, and the sell-off outside of tech stocks is also accelerating

Among the "Magnificent Seven" tech stocks, Apple fell 1.8% from its all-time high, Amazon dropped 2.4%, Microsoft declined 2.2%, Google A fell 2.1%, Meta decreased by 1.5%, and Nvidia and Tesla saw deeper declines, falling nearly 3% and over 4%, respectively, with Tesla briefly dropping 6.1%. The Roundhill Magnificent Seven ETF, which tracks these tech stocks, fell as much as 3.3% to a weekly low.

The sell-off outside of tech stocks is also accelerating. Among the S&P 500 index constituents, about 412 stocks declined, with the S&P technology sector dropping 1.8% the most, followed by a 1.6% decline in the consumer discretionary sector and a 1.2% drop in the communication services sector, while the energy sector rose against the trend with increasing oil prices.

Analysts pointed out that there were almost no economic data or news driving significant market changes on Friday, coupled with European stocks returning after a two-day holiday and overall market trading being light during the year-end holiday week, which highlighted the impact of chips and large technology stocks that had been heavily bought earlier this month.

The 10-year U.S. Treasury yield hovers at a seven-month high, increasing downward pressure on U.S. stocks, along with profit-taking and other technical factors

Tom Essaye, editor of the daily market research report The Sevens Report, noted that in the absence of major news, data, and light trading, the 10-year U.S. Treasury yield, as an anchor for asset pricing, will impact the stock market; the higher the yield, the greater the pressure on the stock market.

Paul Hickey, co-founder of Bespoke Investment Group, shares the same view, stating that the 10-year U.S. Treasury yield has recently continued to test 4.60%, reaching a seven-month high, while the highest rate back in April of this year had surpassed the 4.70% mark. "If it (re) achieves this level in the coming days, it could pose problems for the stock market."

On Friday, the movement of U.S. Treasury yields was mixed, with short-term yields, which are more sensitive to interest rates, declining, while the 10-year U.S. benchmark Treasury yield briefly rose to 4.62%, close to the seven-month high of 4.64% reached yesterday, causing the U.S. Treasury yield curve to steepen

David Kruk, the trading director of La Financiere de L’Echiquier in France, stated that the most important phenomenon by the end of this year is the rise in the yield of 10-year U.S. Treasury bonds:

“This indicates that everyone is waiting for the impact of inflation after Trump takes office in January. Additionally, most trades are technical, such as short covering and profit-taking, but there is no significant trend like there usually is at this time of year.”

Some analysts also pointed out that due to the resilience of the U.S. economy, investors are more concerned that Trump's tariff and tax reduction policies will stimulate price increases, forcing the Federal Reserve to adopt a more hawkish stance, while also watching to see if the employment and inflation data in mid-January unexpectedly disrupt the Fed's plans.

Currently, traders are betting that the Federal Reserve will cut interest rates less than twice by the end of 2025. Since the eve of the Federal Open Market Committee (FOMC) meeting on December 17, the yields on 5 to 30-year U.S. Treasury bonds have collectively risen by more than 15 basis points. As of Thursday, the Bloomberg U.S. Treasury Index has fallen by 1.7% in December, reducing the annual increase to less than 0.5%.

Goldman Sachs: U.S. pensions will sell $21 billion in U.S. stocks by year-end, and CTAs will sell another $4 billion

Mainstream investment banks like Goldman Sachs have also noted the pressure on market liquidity and the technical factors of pension funds reallocating between stocks and bonds at year-end, which may exacerbate short-term market sell-offs and volatility.

On one hand, traders will focus on the repurchase market next week, wary of a potential repeat of the brief financing pressure seen at the end of the third quarter this year.

At the same time, Goldman Sachs' trading department estimates that, given the trends in stocks and bonds, U.S. pensions will sell $21 billion in U.S. stocks and purchase an equivalent amount in bonds by the end of the month. Before a slight sell-off on Wednesday, the rebalancing amount had reached as high as $30 billion.

Based on the absolute dollar value of all buy and sell transactions over the past three years, the $21 billion in U.S. stocks to be sold ranks in the 86th percentile, indicating a relatively high amount and significant selling pressure. Since January 2000, it ranks in the 87th percentile, which seems to help explain the sudden market sell-off.

Additionally, Goldman Sachs pointed out on Monday that the S&P's decline triggered by the Fed's "hawkish rate cut" last week also led to some CTA sell-offs. These momentum-driven "smart money" sold about $7.5 billion in U.S. stocks over the past five days and is expected to sell another $4 billion in the next five days, although the CTA sell-off wave has mostly passed.

Most Wall Street analysts are optimistic about U.S. stocks next year, downplaying the impact of short-term volatility

Citigroup U.S. stock strategist Scott Chronert remains optimistic about U.S. stocks and downplays the impact of short-term volatility. He believes that high valuations and implied growth expectations set a high standard for the stock market in the coming year:

"Overall, this pattern, combined with a lack of a real stock market correction over a period of time, indeed makes the market more susceptible to increased volatility. However, if the fundamentals remain intact, we will buy when the S&P 500 index corrects in the first half of next year."

The above mentions that Tom Essaye of The Sevens Report also believes that the recent stock market decline has somewhat diminished the blind excitement of retail investors, but it has not weakened the sentiment of professional advisors:

"Market sentiment is no longer blindly optimistic, and ordinary investors have a more balanced outlook on the market's prospects as the new year begins, which will be a good thing as it reduces the risk of a stock market bubble.

However, if we receive bad political news or Federal Reserve officials signal a 'pause' in rate hikes, this could lead to more short-term, significant declines in the U.S. stock market."

John Higgins, Chief Market Economist at Capital Economics, reiterated that the S&P 500 index could rise another 16% by 2025, potentially nearing 7000 points by the end of next year. He also mentioned that the bond market sell-off has led to a softening of the stock market since last week:

"This optimistic view is based on the belief that the 10-year TIPS yield will not be higher by the end of next year than it is now. Additionally, the future 12-month earnings per share of S&P 500 constituent companies will continue to grow slightly.

We also still do not believe that the U.S. will engage in large-scale fiscal expansion through deficit financing, which would significantly raise the term premium on U.S. Treasuries, while the current term premium on U.S. Treasuries remains at a low level."