The recent performance of the US stock market has painted a picture of recovery, as all major indices witnessed considerable rebounds last weekThis came on the heels of Federal Reserve Chair Jerome Powell’s reassurances that the central bank is not in a hurry to cut interest rates, prompting investors to reassess the ongoing implications of tariff policies set by the current administrationWith US Treasury yields falling, risk appetite among investors seemed to heat up, leading to the Nasdaq Composite Index reclaiming the significant 20,000-point threshold after three weeks of volatility.

In the short term, the fluctuations induced by tariffs are expected to persist, leading to inconsistent capital flows into stock fundsHowever, the marginal effects of these influences appear to be diminishing, as a number of investors opt to wait for tangible impacts instead of acting preemptivelyThe ongoing debate regarding the trajectory of the Federal Reserve's monetary policy continues unabated.

Federal Reserve Maintains Cautious Stance

Recent inflation data from January caught significant attention, revealing a higher-than-expected rise, primarily driven by increases in food and service pricesThe Consumer Price Index (CPI) reported a month-over-month increase of 0.5%, marking the highest level in nearly a year and a halfIn a related development, the Producer Price Index (PPI, which serves as an upstream cost indicator) rose by 0.4% in January, accelerating by 0.1 percentage points from previous figures.

At the same time, the U.S. employment market remains stable, as evidenced by a drop in initial jobless claims last week, which fell by 0.7 thousand to a total of 213,000. This indicator has shown an overall declining trend this year, consistent with historically low layoff ratesDespite this, job opportunities for unemployed individuals have diminished compared to a year ago, as businesses are adopting a cautious outlook.

In light of the prevailing price and employment conditions, it is anticipated that the Federal Reserve may choose to pause rate cuts while evaluating the impacts of the administration's policies

Advertisements

During a recent congressional hearing, Powell reiterated the Fed’s cautious approach, stating, “We are close to our inflation targets, but we have not yet met them.” He further commented that “we would like to maintain our current restrictive policy for the time being.”

Moreover, medium- to long-term US Treasury bonds experienced fluctuations in connection with rate expectations, as the yield on the two-year Treasury decreased by 1.9 basis points to 4.258%. Similarly, the benchmark ten-year Treasury yield fell by 0.8 basis points to 4.475%. Futures tied to the federal funds rate indicate that the market maintains expectations for a potential 40 basis point rate cut by the Fed this year, suggesting that two such cuts have not yet been fully priced into the market.

Importantly, hawkish sentiments have reemerged within the Federal ReserveDallas Federal Reserve President Lorie Logan reiterated her stance last week, suggesting that even if inflation nears the Fed’s 2% target over the next few months, this might not necessarily prompt a rate cut in response. “I believe that the extent to which monetary policy is currently restrictive is a real questionTherefore, we need to proceed with caution,” Logan said, pointing out the uncertainty as to whether inflation will genuinely cool in the short term, especially given the trend of high inflation rates at the beginning of previous years, which often led companies to implement price hikes.

Thomas Simons, Chief U.SEconomist at Jefferies, commented, “Powell has shifted the Fed’s approach to rate cuts to a ‘no rush’ stanceThe rise in long-term rates isn't solely attributed to investor concerns over inflation.”

In a report shared with major financial outlets, TD Securities emphasized the resilience of the labor market and the strength of household balance sheets, indicating that consumer spending is expected to grow steadily through 2025. Despite the surge in tariff threats introducing some uncertainty, the Federal Reserve wishes to proceed cautiously because the optimal neutral federal funds rate remains unclear

Advertisements

Some Fed officials have integrated tariff projections into their forecasts; however, the specific impacts still need further quantification.

Tech Stocks Lead the Market Rally

Despite the turmoil brought on by tariff announcements, fluctuating economic indicators, and CPI data exceeding expectations, the US stock market managed a stabilization and rebound last weekThe S&P 500 index crossed the 6,100 mark, achieving a new milestone.

According to statistics from the Dow Jones, most sectors experienced gains, with the technology sector leading the charge with a 3.8% increase, followed by the communication services sector’s 2% riseMeanwhile, materials, consumer goods, energy, and utilities saw their stock prices rise by over 1%. The artificial intelligence sector continued its strong performance, with Advanced Micro Devices’ shares soaring by 32% over the week, and the company’s sales forecasts for fiscal year 2026 outpacing market expectations, while Intel’s stock rose by 24%. The U.SVice President emphasized the need for the “most powerful” AI systems to be built within the United StatesAmong the various industries, only healthcare and financial services reported declines.

Investor sentiment remains closely tied to the evolving tariff landscapeThe President of the United States is calling for reciprocal tariffs on imports from all American trading partners, and the newly nominated Secretary of Commerce, Gina Raimondo, has indicated that relevant research will be completed by April 1.

Data on fund flows reveal that investors have pulled out of equity funds for the second consecutive week, marking the fifth instance in the last six weeksRising inflationary pressures, disappointing economic data, and concerns regarding reciprocal tariffs have dampened risk appetitesAccording to figures provided by the London Stock Exchange Group (LSEG), U.S. stock funds saw a net outflow of $2.25 billion in the past week.

Despite this, JPMorgan continues to maintain a positive outlook for the U.S. stock market. “The fluctuations surrounding DeepSeek and worries over tariffs have not derailed our positive perspective on risk assets, particularly in the United States

Advertisements

Charles Schwab noted in its market outlook that despite the higher-than-expected inflation data and new tariff announcements, the U.S. stock market thus far has experienced gainsIt remains uncertain how long tariffs will be enforced, whether they are merely a negotiating tactic, and whether they will ultimately have any inflationary impactThe market seems willing to overlook potential consequences unless they are manifest in economic data.

The firm concluded that as long as economic indicators and profit growth expectations remain steady, and with ten-year Treasury yields still below the 4.80% high seen in mid-January, the stock market is likely to retain an optimistic biasWith key data releases coming up, including Nvidia's earnings report on February 26 and the Personal Consumption Expenditures (PCE) index on February 28, there are currently no significant market catalysts on the horizonOverall, while the U.S. stock market navigates an environment characterized by heightened risks, manageable tariff impacts and a continued decline in Treasury yields will bode well for stock performance.