(Bloomberg) — Stocks lost strength following a furious post-election rally that prompted calls for a pause amid signs of buyer fatigue.

Stocks have fallen from near all-time highs, with the S&P 500 remaining near technically overbought levels. This follows a rise that has sent the benchmark indicator up 25% this year. Several metrics highlight traders’ strong optimism, including the latest figures from the American Association of Individual Investors, which showed a rise in bullish sentiment last week.

“The stock market is showing signs of fatigue,” said Matt Maley of Miller Tabak + Co. “It may soon experience a slight pullback, which would actually be normal and healthy.”

As Jerome Powell’s speech approaches on Thursday, traders have been poring over economic data. U.S. producer prices recovered in October, fueled in part by gains in portfolio management and other categories that drive the Federal Reserve’s preferred inflation gauge. Claims for unemployment benefits fell to their lowest level since May.

“The question we ask ourselves is whether Powell’s dovish tone will set the tone for a rise in long-term rates. On this issue alone, we say ‘no for now,'” noted Andrew Brenner of NatAlliance Securities. “But he will continue to support Fed easing in the near term, and even that will have limited effect.”

The S&P 500 fell to around 5,970 points. The Nasdaq 100 slipped 0.3%. The Dow Jones Industrial Average lost 0.3%. Nvidia Corp. paced technology gains, although Cisco Systems Inc. sank on conservative annual forecasts. Walt Disney Co. jumped 7% on higher profit.

Yields on the 10-year Treasury slipped five basis points to 4.41%. The Bloomberg Dollar Spot Index faltered.

Stocks lost strength after a strong post-election rally that reflected optimism that President-elect Donald Trump’s agenda would support business growth.

Even if this upward momentum remains intact – with investors still reluctant to sell – caution is required, according to Fawad Razaqzada of City Index and Forex.com. The S&P 500 is clearly overbought by several indicators, signaling that a correction or consolidation may be necessary, he noted.

“While a selloff seems unlikely without the index first breaking through several support levels, current conditions suggest that a slight pullback may be in order for the S&P 500,” Razaqzada added. “For seasoned traders, a short-term pullback could offer buying opportunities, even if a clear trend reversal signal has yet to emerge.”

The S&P 500 could reach 6,100 before the end of the year amid enthusiasm over the Republican victory in the White House and Congress, but surpassing that level could prove difficult in the short term, according to Mike Wilson of Morgan Stanley.

The market could be pressured by any rise in benchmark borrowing rates or by expectations of less aggressive monetary easing from the Fed, Wilson said in an interview on Bloomberg Television, adding that pullbacks would be probably seen as buying opportunities.

The benchmark U.S. stock index is expected to rise by the end of the year – with a market collapse possible, but that’s not a base case scenario, according to UBS Group AG strategists including Maxwell Grinacoff .

With Commodity Trading Advisor funds already positioned at maximum long position, marginal upside potential compared to options brokers’ short gamma positioning, and Trump’s re-election well priced, a market rally is a more likely scenario, they said. note.

The stock market has mostly ignored rising bond yields as economic growth continues, but it’s still worth watching.

According to Dennis DeBusschere of 22V Research, the higher odds of a Fed taper in December increase the chances that an already strong economy will strengthen further. Economic data needs to remain consistent with growth of around 2.5% (or less) for 10-year yields to stay where they are, he added.

“We believe 10-year yields remain around current levels, but growth above 2.5% will lead to higher yields and an eventual breakout above 4.55%,” DeBusschere noted. “This level of yield would provide a headwind for small caps, debt risk securities and other riskier factors, if any.”

In fact, even though Trump’s victory in the US election has propelled the Russell 2000 of small companies to levels last seen three years ago, the excess weight of interest rates remains an obstacle.

Morgan Stanley’s Wilson said this week that a key risk for small caps that is present today and did not exist in 2016 is the market’s negative correlation with rates, whereas it was positive previously. eight years ago when Trump first entered the White House. The Russell 2000 index rose 60% during Trump’s first term, while still lagging the S&P 500 and Nasdaq 100 indexes.

“In other words, in the current late-cycle environment, the negative sensitivity of these cohorts to rising rates is greater than it was during this period,” he said. warned its customers in a note. “If rates were to rise again after the election, these cohorts could be held back from a relative performance perspective. »

The possibility of a resumption of inflation is envisaged, although even more encouraging US data is unlikely to derail risk appetite since there will be a new inflation figure in December before the next Fed meeting, according to Andrew Tyler of JPMorgan Chase & Co.

Several policymakers called for a cautious approach to further interest rate cuts in their comments this week, in light of a strong economy, lingering inflation concerns and widespread uncertainty.

Fed Bank of Richmond President Tom Barkin said the central bank had made “great progress” but stressed that officials could not claim victory. Fed Governor Adriana Kugler said policymakers must stay focused on the central bank’s goals on inflation and employment.

“We believe Powell will take a cautious tone and indicate that given the strength of the actual data and the need to return inflation to target, it will likely be appropriate to slow the cuts by early 2025,” Krishna said Guha of Evercore.

Guha’s base case scenario sees the Fed cutting rates in December, then three times in 2025 on a quarterly basis (March, June and September) before taking a break at the end of 2025.

Swaps traders put the likelihood that the Fed will cut rates again next month at around 80%.

Company strengths:

• Shares of Hims & Hers Health Inc. fell the most in their five-year history after Amazon.com Inc. said it would begin marketing drugs to combat hair loss, a component important part of the telehealth company’s activities.
• Meta Platforms Inc. was fined 798 million euros ($841 million) by European Union regulators for linking its Facebook Marketplace service to its sprawling social network, the first-ever penalty imposed by the American tech giant for violations of EU antitrust laws.
• ASML Holding NV, the Dutch maker of advanced chipmaking machines critical to global supply chains, reaffirmed its long-term revenue outlook by betting on a boom in semiconductor demand driven by artificial intelligence.
• Ford Motor Co. agreed to a $165 million civil penalty to settle allegations that the company failed to timely recall cars with defective backup cameras, the second-largest fine ever imposed by the National Highway Patrol Traffic Safety Administration.
• Merck & Co. has licensed an investigational cancer antibody from a closely held Chinese company in a deal initially worth $588 million, plus up to $2.7 billion in milestone payments.
• General Mills Inc., known for cereal brands such as Cheerios, has made its fifth pet food acquisition since 2018 by purchasing the North American unit of Whitebridge Pet Brands in a transaction valued at $1.45 billion.
• Capri Holdings Ltd and Tapestry Inc. have abandoned their proposed $8.5 billion merger after a court ruling froze the U.S. fashion companies’ proposed tie-up over objections from antitrust regulators.
• JD.com Inc.’s quarterly revenue rose 5.1%, a moderate expansion that suggests Chinese consumers are again spending cautiously as Beijing tries to revitalize the economy.

Key events this week:

• Retail sales and industrial production in China, Friday
• U.S. Retail Sales, Empire Manufacturing, Industrial Production, Friday

Some of the main market movements:

Actions

• The S&P 500 fell 0.3% as of 12:02 p.m. New York time
• The Nasdaq 100 fell 0.3%
• The Dow Jones Industrial Average fell 0.3%
• The Stoxx Europe 600 increases by 1.1%
• The MSCI World index fell 0.2%

Currencies

• Bloomberg Dollar Spot Index little changed
• The euro was little changed at $1.0560
• Sterling was little changed at $1.2703.
• The Japanese yen fell 0.3% to 155.98 per dollar

Cryptocurrencies

• Bitcoin rose 0.4% to $88,961.39
• Ether rose 0.2% to $3,161.25

Bonds

• The 10-year Treasury yield fell five basis points to 4.41%
• The German 10-year yield fell five basis points to 2.34%
• The UK 10-year yield fell four basis points to 4.48%

Raw materials

• West Texas Intermediate crude rose 0.3% to $68.65 a barrel
• Spot gold little changed

This story was produced with the help of Bloomberg Automation.

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