Market Wrap: Rally Fizzles by Close Despite Strong Start and AI Optimism

The stock market began the day on a strong note, buoyed by enthusiasm in mega cap and chipmaker stocks, but gains moderated by the session's end. The S&P 500 closed up 0.6 percent, and the Nasdaq Composite advanced 1.2 percent, while the Dow Jones Industrial Average and Russell 2000 both dipped by 0.1 percent.

Early momentum was driven by AI optimism and technical factors, but fading buying interest and mixed economic signals tempered the rally.

Mega Cap and Chipmaker Strength

NVIDIA was a standout performer, gaining 3.4 percent ahead of CEO Jensen Huang's keynote address at the Consumer Electronics Show. The company's strong session reflects broader investor enthusiasm for artificial intelligence, which was further fueled by Foxconn's record 15 percent year-over-year revenue growth in the fourth quarter.

The chipmaker-heavy Nasdaq Composite benefited significantly, continuing its strong start to the year with a 2.9 percent gain year-to-date.

Market sentiment was bolstered early on by technical support, as the S&P 500 opened above its 50-day moving average of 5,948 and maintained that level throughout the session. However, enthusiasm faded as Treasury yields fluctuated, with the 10-year yield settling at 4.61 percent after a choppy day.

Sector Performance: Tech Leads, Defensives Lag

The day saw a mixed performance across sectors, with seven of the S&P 500's 11 sectors closing lower. The rate-sensitive utilities and real estate sectors were the biggest laggards, declining by 1.1 percent and 1.4 percent, respectively. In contrast, communication services and information technology led the pack, gaining 2.1 percent and 1.4 percent, respectively.

This sectoral divergence highlights continued investor preference for growth-oriented, innovation-driven industries over defensive plays.

Economic data released during the session provided a mixed picture:

Factory orders fell 0.4 percent month-over-month in November, slightly worse than the expected 0.3 percent decline. Excluding transportation, orders rose 0.2 percent, indicating modest underlying strength in manufacturing activity.

The December S&P Global US Services PMI was revised down to 56.8 from an earlier reading of 58.5 but still came in higher than November's final reading of 56.1. This suggests an acceleration in service sector expansion, underscoring resilience in consumer-facing industries.

Market sentiment was also affected by President-elect Trump’s comments denying plans to soften tariff policies, which added to investor uncertainty and contributed to the afternoon pullback.

Year-to-Date Performance

Major indices are off to a generally positive start in 2025. The Nasdaq Composite is leading with a 2.9 percent year-to-date gain, followed by the Russell 2000 and S&P 500, both up 1.6 percent. The Dow Jones Industrial Average, however, has lagged, with a modest 0.4 percent increase.

Looking Ahead

Investors will be closely monitoring Tuesday’s economic data, including the November Trade Balance, December ISM Services PMI, and November JOLTS job openings report. These indicators will provide further insights into the health of the economy and could set the tone for the next phase of market activity.

Strategic Implications for Investors

1. Technology Momentum: Continued strength in AI and semiconductor stocks underscores their leadership role in driving market performance. Investors may consider increasing exposure to innovation-driven sectors.

2. Defensive Weakness: The underperformance of rate-sensitive utilities and real estate reflects shifting investor preferences amid fluctuating yields.

3. Economic Resilience: Positive data in the services sector suggests pockets of economic strength, providing opportunities in consumer-facing industries.

4. Policy Risks: President-elect Trump’s tariff stance adds an element of uncertainty. Investors should remain vigilant as geopolitical and trade policy developments unfold.

Conclusion

While the stock market started the day with strong gains, the late-session fade reflects a cautious investor stance amid mixed economic data and policy uncertainty. The leadership of technology and communication services sectors highlights the market’s continued focus on growth, even as defensive sectors face headwinds.

As 2025 progresses, investors should stay attentive to macroeconomic indicators and policy developments, balancing opportunities in growth sectors with strategies to mitigate potential risks.