Is there still a Santa Claus rally? Understand why US stocks fell sharply on Friday in a single article.

December 27 is the last Friday trading day of 2024. Although market participants are eagerly anticipating the arrival of the "Santa Claus rally," contrary to their wishes, the US stock market accelerated its decline in early trading on Friday, with large tech stocks, the darlings of the market this month, leading the way down. At the opening bell, US stocks collectively traded near the day's lows, with the S&P 500 index widening its decline to 1.4%, the Dow falling for the first time in six trading days, dropping over 420 points or about 1%, and the tech-heavy Nasdaq falling about 2%, with the chip index posting the deepest decline of 2.3%. Large tech stocks led the decline on Friday, with Tesla falling over 6% at one point, and selling outside of tech stocks also accelerating. Among the "Big Tech Seven Sisters," Apple fell 1.8% off its all-time high, Amazon fell 2.4%, Microsoft fell 2.2%, Alphabet fell 2.1%, Meta fell 1.5%, NVIDIA and Tesla had even deeper declines, dropping nearly 3% and over 4% respectively, with Tesla falling 6.1% at one point. The Roundhill Magnificent Seven ETF, which tracks the Big Tech Seven Sisters, fell 3.3% to a one-week low. Selling outside of tech stocks also accelerated. About 412 stocks in the S&P 500 index declined, with the tech sector having the deepest decline of 1.8%, followed by the non-essential consumer goods sector with a 1.6% decline and the communication services sector with a 1.2% decline, while the energy sector followed the oil price by rising against the market. Some analysts pointed out that on Friday, there were almost no major economic data or news to drive significant market changes, coupled with the return of European stocks after a two-day holiday break, and the overall thin trading volume in the year-end holiday week, highlighting the impact of the earlier rush to buy chips and large tech stocks this month. The 10-year Treasury yield hovering near a seven-month high is exacerbating the downward pressure on US stocks, along with technical factors such as profit-taking. Tom Essaye, editor of the daily market research report The Sevens Report, wrote that with no major news, data or thin trading currently, the 10-year Treasury yield, as an anchor for asset pricing, will have an impact on the stock market. The higher the yield, the greater the pressure on the stock market. Paul Hickey, co-founder of Bespoke Investment Group, also holds the same view, stating that the 10-year Treasury yield recently rose to around 4.60%, setting a new seven-month high. If it reaches the previous high of over 4.70%, it could pose problems for the stock market. On Friday, there was mixed movement in Treasury yields, with short-term bond yields, which are more sensitive to interest rates, falling, while the yield on the 10-year US benchmark Treasury bond rose to 4.62% at one point, close to the seven-month high set at 4.64% yesterday, leading to a steeper yield curve. David Kruk, head of trading at La Financire de LEchiquier in France, said that the most significant phenomenon at the end of the year is the rise in the 10-year Treasury yield: "This indicates that everyone is waiting to see the impact of inflation after Trump's inauguration in January. Additionally, most of the trading is technical, such as short covering and profit-taking, but there are no major trends as we usually see at this time of year." Some analysts point out that due to the resilience of the US economy, investors are more concerned about Trump's tariffs and tax policies leading to price increases, forcing the Fed to take a more hawkish stance, while also watching whether the mid-January employment and inflation data will disrupt the Fed's plans. Currently, traders are betting that the Fed will cut interest rates less than twice by the end of 2025, with the yield on 5-30 year US Treasury bonds collectively rising by over 15 basis points since the eve of the Fed FOMC meeting on December 17th. As of Thursday, the Bloomberg US Treasury Index has fallen by 1.7% in December, reducing its year-to-date gain to less than 0.5%. Goldman Sachs: US pension funds will sell $21 billion of US stocks before the end of the year, with CTAs selling another $4 billion Goldman Sachs and other mainstream investment banks have also noted the pressure on market liquidity, end-of-year rebalancing between equities and bonds by pension funds, and other technical factors that may exacerbate short-term market selling and volatility. Next week, traders will focus on the repo market, alert to the possibility of a repeat of the short-term funding pressure seen at the end of the third quarter. In addition, Goldman's trading desk estimates that due to the movement in stocks and bonds, US pension funds will sell $21 billion of US stocks, and buy an equal amount of bonds by the end of the month, with the rebalancing amount reaching as high as $30 billion before the small sell-off on Wednesday. Based on the absolute dollar value of all buying and selling valuations in the past three years, the $21 billion amount of US stocks to be sold ranks in the 86th percentile, indicating a high amount and selling pressure. Since January 2000, it ranks in the 87th percentile, which may help explain the sudden market sell-off. Additionally, Goldman pointed out last Monday that the "hawkish rate cut" by the Fed last week triggered a decline in the S&P 500 index, which also sparked some selling by CTAs, with these trend-following "smart money" selling about $7.5 billion of US stocks in the past five days, and an expected further sale of $4 billion in the next five days. However, the wave of CTA selling has essentially passed. Most Wall Street analysts remain optimistic about US stocks next year and are not concerned about the impact of short-term volatility. Scott Chronert, a US stock strategist at Citigroup, remains bullish on US stocks and downplays the impact of short-term volatility. He believes that high valuations and implied growth expectations have set high standards for the stock market over the next year: "Overall, this setup, combined with a lack of real pullback in the stock market for some time, does make the market more susceptible to increased volatility. But if the fundamentals continue, we'll be buyers in the S&P 500 during the first half of next year. Tom Essaye of The Sevens Report also believes that the recent stock market decline has dampened the excitement of retail investors, but has not dampened the sentiment of professional investment advisers: "The market sentiment is no longer blindly optimistic, and regular investors are more balanced in their outlook for the market at the start of the new year, which is a good thing, as it lowers the pressure on the stock market."The risk of a bubble.However, if we receive bad political news, or if Federal Reserve officials signal a 'pause' in rate cuts, this could lead to (the US stock market) experiencing more short-term, significant declines." Meanwhile, John Higgins, chief market economist at Capital Economics, reiterated that the S&P 500 index could rise by another 16% in 2025, reaching close to 7000 points by the end of next year. He also mentioned that last week's stock market weakness was caused by bond market sell-offs: "This optimistic view is based on the belief that the 10-year TIPS yield will not be higher by the end of next year than it is now. In addition, the future 12-month earnings per share of S&P 500 component companies are expected to continue to grow slightly. We also do not believe that the US will engage in large-scale fiscal expansion through deficit financing, as this would significantly increase the term premium on US Treasury bonds, which is currently at a relatively low level." This article is excerpted from "Wall Street View" and edited by GMTEight: Zhang Jinliang.