Microsoft Slide and Weak Jobs Data Drag Markets Down Fed Rate Cut Now a "Sure Thing" After Labor Market Stalls
- Stocks fell as Microsoft lowered AI adoption expectations and sparked fears about the return on investment for tech spending.
- Private payrolls unexpectedly dropped by 32,000 in November which virtually guarantees a Federal Reserve rate cut next week.
- Consumer sentiment remains fragile as retailers like Macy's issue weak profit forecasts despite the holidays.
The stock market hit a wall of anxiety on Wednesday. A dual threat of disappointing technology news and alarming economic data sent shivers through Wall Street. Investors are suddenly questioning the massive capital expenditures pouring into artificial intelligence. At the same time the labor market flashed a major warning signal. Bond yields dropped alongside the dollar as traders doubled down on bets that the Federal Reserve will be forced to cut rates next week.
The technology sector led the decline after a report surfaced regarding Microsoft. The software giant has reportedly lowered its internal expectations for how quickly customers will adopt its new AI products. This news drove the stock down more than 2 percent. It ignited a broader fear that the return on investment for the AI boom might take much longer than promised. Marvell Technology was the lone bright spot in the sector. The chip designer rallied after assuring the market that orders for its custom units remain robust.
The economic data provided a stark backdrop to the tech slide. ADP Research released a report showing that private companies shed 32,000 jobs in November. This was the largest drop since early 2023 and completely missed economist forecasts for a 10,000 job gain. The labor market has now contracted four times in the last six months. This trend suggests that the cooling economy is starting to freeze in certain sectors.
This weak jobs report effectively locks in a Federal Reserve pivot. Ian Lyngen at BMO Capital Markets believes this removes any remaining doubt about the central bank's next move. A 25 basis point rate cut next week is now seen as a certainty. The conversation has shifted from "will they cut" to "how much help does the economy need." The doves at the Fed now have the ammunition they need to push for continued easing.
Main Street appears to be hurting far more than the headline numbers suggest. David Russell at TradeStation pointed out that small businesses are struggling under the weight of uncertainty and potential tariffs. The AI boom is lifting massive corporations but leaving smaller players behind. Wages have not collapsed yet which indicates this is currently a crisis of confidence rather than a full blown recession. However the stagnation in job creation is undeniable.
The corporate landscape offered further evidence of a divided economy. Macy's shares tanked after the retailer provided a disappointing profit forecast. This overshadowed their solid performance leading up to the holiday season and hinted at consumer fatigue. Meanwhile ByteDance is aggressively expanding despite the global uncertainty. The TikTok parent company confirmed plans to invest over $37 billion to build a renewable energy data center in Brazil.
The bond market reacted swiftly to the deterioration in data. Yields on two year Treasuries slipped to 3.49 percent as investors priced in a more dovish Fed. Bitcoin managed to hold its ground near $93,000 amid the volatility. The market dynamic has entered a confusing phase. Bad economic news is being treated as a positive signal for liquidity but a negative signal for corporate growth. The Fed is now walking a tightrope between saving the labor market and reigniting inflation.