Is the Santa rally coming to an end?

On Friday, U.S. stocks experienced a decline as investor confidence fell. The Dow Jones Industrial Average ended the day down over 300 points, and the Nasdaq Composite Index, which focuses on tech stocks, dropped by 1.5%. However, stocks managed to recover some losses from deeper dips earlier in the day.

“Initially, the market was very optimistic about the Trump election, but now there’s more uncertainty with tariffs and immigration policies as we approach the next year,” explained Keith Lerner, the co-chief investment officer and chief market strategist for Truist. “Inflation is increasing, and the 10-year note has been rising gradually.”

The 10-year U.S. Treasury note was trading around 4.62% on Friday afternoon, after having increased by about 30 basis points in the past month. Bond yields typically rise when bond prices fall, which happens when investors expect inflation to increase. Inflation is also likely to squeeze company profit margins, leading to a decrease in stock value.

Torsten Slok, Chief Economist at Apollo Global Management, stated in a note to clients in mid-December, “The robust economy, combined with the potential for reduced taxes, increased tariffs, and tighter immigration restrictions, raises the chance that the Federal Reserve might need to increase rates in 2025.”

“We estimate a 40% chance that the Fed will raise interest rates in 2025,” Slok added. “For investors, the scenario is starting to resemble 2022 – inflation is too high, interest rates are climbing, and stock prices are falling.”

Much of Friday’s drop was concentrated in tech stocks. NVIDIA Corporation shares fell more than 2%, while Amazon.com Inc. and Microsoft Corporation stocks each declined nearly 2%.

Despite the downturn on Friday, 2023 has been a remarkable year for the stock market. The S&P 500 index has gained over 25%, and the Nasdaq has risen by 32%. Additionally, NVIDIA shares are still up nearly 180% for the year, despite some volatility in recent weeks.

Tech firms are generally viewed as being more sensitive to interest rate increases because they often invest heavily in growth as opposed to more established industries. Among the 11 sectors of the S&P 500, technology was one of the biggest losers, only behind the consumer discretionary sector, which includes Amazon.

“There’s a cautious attitude in the market,” Lerner told YSL News, indicating that investors who embraced riskier investments might be reconsidering their strategies.

(This story was updated to provide fresh information.)