Last week, the US stock market exhibited a rollercoaster of fluctuations, primarily driven by concerns over tariffs that affected sentiment at both the beginning and the close of the trading week. The underperformance of major tech stocks emerged as a significant drag on the overall market.

The Federal Reserve finds itself at a challenging crossroads. In a pivotal report, the latest non-farm payroll data revealed that the United States added 143,000 jobs in January, slightly below expectations from the market. Meanwhile, the unemployment rate dipped just 0.1 percentage points, settling at 4.0%. Analysts speculate that recent wildfires in California and harsh winter conditions across much of the country may have influenced the employment landscape.

Our investigations show that Washington analysts generally maintain an optimistic view on the health of the US labor market. The economy appears to be generating sufficient job opportunities to sustain employment levels. Although the pace of hiring has decelerated since last year, most Americans seeking jobs are successfully landing them, and layoffs remain minimal. Companies are adopting a wait-and-see strategy regarding their recruitment plans, pending the implementation of economic initiatives. Industry surveys reveal widespread support for tax cuts and regulatory rollbacks, although caution prevails regarding stances on tariffs.

Interestingly, these concerns have seeped into consumer sentiment. The University of Michigan's February consumer confidence index dropped sharply from January's 71.1 to 67.8, marking a significant decline over two consecutive months. Survey respondents indicated that their one-year inflation expectations surged from 3.3% in January to 4.3%, the highest level observed since November 2023. The five-year inflation outlook also rose slightly from the previous month's 3.2% to 3.3%, reaching levels not seen since 2008.

The economic uncertainties stemming from tariffs, coupled with rising inflation, have led to volatile movements in the mid- to long-term US Treasury yields. The two-year Treasury note, which is closely tied to interest rate expectations, saw an increase of 4.2 basis points over the week, reaching a two-week high of 4.277%. Conversely, the benchmark 10-year Treasury yield dropped by 8.2 basis points to 4.483%. Federal funds futures indicate that the Fed is unlikely to consider its first rate cut before June of this year.

In a report sent to us, TD Securities articulated the current situation: “Inflation has stagnated in recent months, and there is escalating uncertainty regarding the extent to which the new administration will act on tariffs. As a result, the Fed may exercise caution concerning rate cuts and maintain policy rates stable until sometime this summer.”

Bob Schwartz, a senior economist at Oxford Economics, highlighted that the Fed has hinted at pausing interest rate hikes as it seeks to understand the impacts of rate changes on the labor market and inflation.

Uncertainty and volatility loom over the markets once more. The three major stock indices plummeted in the closing moments of trading, completely erasing gains accrued throughout the week. Both the Nasdaq and S&P 500 indices recorded their second consecutive week of losses.

Goldman Sachs indicated that high tariffs could pose downside risks to the earnings projections and return expectations for the S&P 500. “If corporate management decides to absorb the increased input costs, profit margins will face pressure. Conversely, if companies pass these higher costs onto consumers, sales volumes may be negatively impacted.” They estimate that a five-percentage-point increase in US tariffs could lead to a 1%-2% reduction in earnings per share for the S&P 500.

Diving deeper into sector performance, Dow Jones Market statistics revealed a notable divide among industries last week. Non-essential consumer goods and communication services took the hardest hits, with Tesla witnessing an 11% decline following the US Federal Highway Administration's announcement to pause the approval of state electric vehicle infrastructure deployment plans for the entire fiscal year. Google's parent company, Alphabet, experienced a 9.2% drop, despite fourth-quarter earnings surpassing expectations, attributed to lackluster revenue growth. In contrast, sectors like consumer staples, real estate, and energy saw slight increases, each rising by about 1%, while technology, finance, and utilities slightly edged higher.

On the investment front, US equity funds have seen outflows for the fourth week out of five, as investors grapple with rising geopolitical risks posed by trade tariffs while simultaneously worrying about earnings from key technology firms. Data from Refinitiv indicates a net outflow of $10.71 billion from US equity funds last week, marking the largest withdrawal since December of last year.

The disappointing cloud revenue growth from Alphabet and AMD's downgraded forecast for data center sales have aggravated investor anxieties around heavy investments in artificial intelligence, leading to a sell-off of $6.44 billion in large-cap stock funds. Amidst a flight to safety, $39.61 billion shifted towards more secure money market funds.

According to Schwab’s market outlook, the potential trade disruptions caused by tariffs combined with the subsequent inflation pressures have negatively impacted market psychology, pushing the volatility index (VIX) above the critical 20 mark at times. The Michigan Consumer Sentiment Survey noted an increase in one-year inflation expectations, identifying tariffs as one of the contributing factors.

Looking ahead, the firm suggests that upcoming monthly inflation data could serve as another significant market-moving factor. While the recent decline in the 10-year Treasury yield may be favorable for stocks, it appears to be correlated with weakened expectations for long-term economic growth.