Artificial intelligence (AI) and tech stocks dragged the Nasdaq Composite (^IXIC -1.69%) down as much as 2.4% at one point today. The Dow Jones Industrial Average (^DJI -0.92%) lost as much as 500 points in a holiday-shortened week usually powered by a Santa Claus rally that has failed to materialize thus far.
Shares of artificial intelligence chipmaker Broadcom (AVGO -1.78%) and e-commerce giant Amazon (AMZN -1.75%) traded close to 2% lower as of 2:26 p.m. ET today. Shares of electric carmaker Rivian (RIVN -2.88%) were down close to 3%.
Feeling the pressure from rising yields
Usually, the subdued final week of the year is met with a Santa Claus rally, which includes the last five trading days of the year and the first two in January. Stocks tend to move higher in the year’s final days, with most investors on vacation and trading volume light. These seven days of the year have averaged gains of 1.3% since 1950.
While there is still time left, the market has underperformed so far. As of this writing, the broader benchmark S&P 500 (^GSPC -1.27%) was down about 0.4% since the close of trading on Dec. 23.
Amazon, Broadcom, and other tech names in the “Magnificent Seven,” which consume a large portion of the broader market due to their gigantic market caps, led the declines today as big tech and artificial intelligence names finally showed some weakness, although they’ve still had a fantastic year. The 10-year Treasury yield advanced past 4.60% today, the highest level seen since May.
Yields have zoomed higher ever since the Federal Reserve’s final meeting of the year, in which Fed chair Jerome Powell and the rest of the Fed’s rate-setting policy indicated they would be more cautious on future interest rate cuts, given the strength of the economy. Most traders betting on federal funds rate futures only think the Fed will cut rates once next year. However, not all are discouraged by the sell-off today.
“The nation is experiencing a collective sigh of relief after navigating through a contentious election cycle and unusual market dynamics to end 2024 with strong year-to-date gains,” Todd Ahlsten, chief investment officer at Parnassus Investments, told CNBC today. “Looking ahead to 2025, the markets are expected to broaden and improve.”
The sell-off isn’t surprising
Today’s sell-off can’t be too surprising for investors, given the market’s great year, high tech and AI valuations, and yields moving sharply higher. Higher yields are less favorable for riskier stocks because investing in safer Treasury bonds becomes more appealing. Many analysts and investors also use the 10-year Treasury yield as the discount rate when discounting cash flows in their financial models, and a higher discount rate leads to a lower present value of cash flows.
It’s a holiday-shortened week, so I wouldn’t read too much into today’s move, but Amazon and Broadcom trade at huge valuations, while Rivian isn’t profitable yet. If yields remain elevated, I expect these stocks to pull back at some point.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
