Market Edges Down Modestly as Treasury Yields Hit Fresh Highs

U.S. equities finished the day with modest declines Friday, with the S&P 500 closing down 0.06%, the Dow Jones Industrials retreating 0.17%, and the Nasdaq 100 slipping 0.07%. March E-mini S&P futures declined 0.06%, while March E-mini Nasdaq futures dropped 0.08%. The market’s early morning gains evaporated as bond yields surged throughout the session.

Fed Chair Speculation Drives Bond Market Volatility

The primary culprit behind Friday’s market pressure was rising Treasury yields. The 10-year T-note yield climbed 6 basis points to a fresh 4.5-month peak of 4.23%, triggered by President Trump’s signals that he may not nominate Kevin Hassett as Federal Reserve Chair. Market participants had regarded Hassett as the most dovish Fed candidate and the leading contender for the position. Instead, Trump indicated preference for Kevin Warsh, widely recognized as a hawk and second in line for the role. This shift in expectations immediately rippled through fixed income markets, crushing speculation about future rate cuts and lifting bond yields higher, which in turn pressured equity valuations.

Earnings Momentum Offsets Rate Concerns

Despite headwinds from rising rates, corporate earnings have provided meaningful support. The first full week of Q4 earnings season has been remarkably strong, with 89% of the 28 S&P 500 companies reporting results beating analyst expectations. Bloomberg Intelligence projects S&P earnings growth of 8.4% for the full quarter, or 4.6% when excluding the Magnificent Seven technology stocks. This earnings strength helped limit Friday’s selloff.

Chipmakers Rally on AI Spending Optimism

Individual stocks showed stark divergence, with semiconductor and data storage companies emerging as clear winners. Confidence in continued artificial intelligence spending surged after Taiwan Semiconductor Manufacturing Company announced it would boost its 2026 capital expenditure forecast on Thursday. Super Micro Computer led the S&P 500 gainers with a jump exceeding 10%, while Micron Technology surged more than 7% to pace Nasdaq 100 gainers. Applied Materials, Lam Research, Broadcom, and ASML Holding each climbed more than 2%, with Advanced Micro Devices, KLA Corp, Seagate Technology, and Texas Instruments all posting gains exceeding 1%.

Energy Sector Stumbles on Trump’s Power Cost Initiative

Energy stocks faced substantial pressure after President Trump announced plans to implement an emergency wholesale electricity auction and require technology companies to bear additional costs for rising power demand. Talen Energy plummeted more than 11%, leading S&P 500 and Nasdaq 100 decliners, while Constellation Energy retreated more than 9%. Vistra fell more than 7%, and NRG Energy dropped more than 4%.

Mixed Economic Data Fails to Provide Clear Direction

Friday’s economic releases sent conflicting signals for equities. December manufacturing production unexpectedly increased 0.2% month-over-month, exceeding forecasts for a 0.1% decline, and November production was revised upward to 0.3% from flat. However, the January National Association of Home Builders housing market index disappointed, sliding 2 points to 37 versus expectations for a rise to 40. This mixed picture did little to provide conviction in either direction.

Treasury Market Shows Significant Stress

The 10-year Treasury note experienced substantial selling pressure Friday, with March T-note futures tumbling to a 4.75-month low. The 10-year yield rose 5.6 basis points to 4.225%, reaching its highest level in 4.5 months. Rising inflation expectations weighed on the market, with the 10-year breakeven inflation rate climbing to a 2.25-month high of 2.326%. The combination of stronger manufacturing data and Fed Chair speculation accelerated losses in the bond complex.

European government bond yields similarly moved higher, with the 10-year German bund yield climbing 1.6 basis points to 2.835% and the 10-year UK gilt yield advancing 1.2 basis points to 4.400%. Meanwhile, ECB Chief Economist Philip Lane signaled no immediate policy changes, with swaps pricing just a 1% probability of a rate hike at February’s meeting.

Global Markets Follow Lower

Overseas equity markets settled lower across the board. China’s Shanghai Composite declined 0.26%, Japan’s Nikkei Stock 225 retreated 0.32%, and Europe’s Euro Stoxx 50 slipped 0.19%, reflecting broad risk-off sentiment globally.

Select Stock Movers

Beyond the semiconductor rally, several notable individual stock moves defined the session. State Street declined more than 5% despite reporting better-than-expected Q4 earnings, as management guided to full-year expense growth of 3% to 4%. Molson Coors Beverage and Brown-Forman each fell more than 3% following analyst downgrades from BNP Paribas. Regions Financial slipped more than 2% after Q4 earnings of 58 cents missed consensus expectations of 62 cents.

On the upside, Rocket Lab surged more than 6% following a Morgan Stanley upgrade to overweight with a $105 price target. GE Vernova climbed more than 6% as analysts noted the company would benefit from Trump’s power initiative. Eaton Corp advanced more than 3% on an HSBC upgrade to buy, while PNC Financial Services rose more than 3% after reporting Q4 non-interest income that exceeded expectations.

Rate Cut Odds Compress Further

Financial markets have significantly reduced expectations for near-term Fed easing, with current odds suggesting just a 5% probability of a 25 basis point rate cut at the January 27-28 FOMC meeting. The shift in Fed Chair speculation combined with stronger economic data has effectively priced out near-term policy accommodation.