The stock market in the United States experienced significant fluctuations last week, primarily driven by concerns over tariffs that influenced investor sentiment during both the market's opening and closing. The underperformance of major technology stocks played a crucial role in dragging down the overall market, highlighting just how interconnected these powerful companies are with broader economic concerns.

Looking ahead, the upcoming week promises to shed more light on tariff decisions, which could have substantial implications for the Federal Reserve's policy expectations. This, in turn, might lead to an uptick in U.S. Treasury yields and the dollar, signaling a potential resurgence of volatility in the markets.

This brings us to the Federal Reserve, which is currently navigating a turbulent economic landscape. A key data point from last week was the U.S. nonfarm payroll figures for January, which revealed an addition of 143,000 jobs—just shy of market expectations. The unemployment rate saw a marginal decline of 0.1% to settle at 4.0%. Analysts suggest that the employment figures may have been impacted by the California wildfires and the unusually cold weather affecting large parts of the country.

Despite these challenges, the labor market remains fundamentally strong. The economy appears to be generating enough job opportunities to maintain unemployment at stable levels. Although hiring has slowed since last year, most individuals seeking employment have been able to secure jobs, and layoffs have remained low. Businesses are essentially biding their time, waiting to see how the government's economic agenda unfolds before committing to further hiring plans. Surveys across industries indicate widespread support for tax cuts and deregulation, but caution prevails regarding tariff policies.

Consumer sentiment has similarly reflected these concerns. The University of Michigan’s consumer confidence index for February dipped markedly from January's 71.1 to 67.8, marking a significant two-month decline. Respondents' one-year inflation expectations surged from 3.3% in January to 4.3%—the highest level since November 2023. Meanwhile, the five-year inflation outlook rose slightly from 3.2% to 3.3%, a peak not seen since 2008.

The uncertainties surrounding tariffs and rising inflation are causing fluctuations in medium- to long-term Treasury yields. The two-year Treasury yield, closely associated with interest rate expectations, increased by 4.2 basis points to reach 4.277%, the highest in two weeks. Conversely, the benchmark ten-year Treasury yield fell by 8.2 basis points to 4.483%. Futures markets indicate that the first potential interest rate cut from the Federal Reserve may not occur until June of this year.

A report from TD Securities notes, "In recent months, the inflation trajectory has been stagnant, with increasing uncertainty regarding how far the new administration will take tariff measures. The Fed may adopt a more cautious stance on interest rate cuts and keep policy rates stable until sometime this summer."

Furthermore, according to Oxford Economics’ senior economist, Schwartz, the Federal Reserve has signaled a pause in interest rate hikes as it aims to gauge the impact of rate changes on both the labor market and inflation. However, some Fed officials have begun factoring tariffs into their forecasts, yet it remains unclear how administrative measures will alter their assumptions regarding the timing or magnitude of tariff impacts.

The market volatility observed last week culminated in a notable drop across all three major stock indices, erasing the gains achieved earlier in the week. Both the Nasdaq and S&P 500 recorded consecutive weekly declines.

Goldman Sachs elaborated on the market dynamics, suggesting that one way pressures might arise is through higher tariffs creating downward risks to earnings expectations and returns for the S&P 500. "Should company management decide to absorb increased input costs, profit margins will be squeezed. Conversely, if companies pass higher costs onto consumers, sales could be adversely affected," they noted. The investment bank estimates that a 5% increase in tariffs could reduce the S&P 500's earnings per share by approximately 1% to 2%.

Statistics from the Dow Jones indicate a varied performance across sectors last week. Non-essential consumer goods and communication services saw the most significant declines, with Tesla plunging 11% as the Federal Highway Administration announced a halt on approval for state plans related to electric vehicle infrastructure deployment. Alphabet, Google’s parent company, fell 9.2% despite better-than-expected fourth-quarter earnings, primarily due to disappointing revenue figures. In contrast, essential consumer goods, real estate, and energy sectors posted gains of 1%, while technology, finance, and utilities sectors saw marginal increases.

In terms of capital flows, U.S. stock funds recorded their fourth week of outflows in the last five weeks, as investors grappled with heightened geopolitical risks stemming from trade tariffs and growing concerns surrounding upcoming earnings reports from key technology firms. Recent data from the London Stock Exchange revealed a net selling of U.S. stock funds amounting to $10.71 billion—the highest since December of the previous year.

The underwhelming cloud revenue growth from Alphabet, coupled with AMD's weak forecasts for data center sales, has intensified investor anxiety regarding substantial investments in artificial intelligence. Consequently, sell-offs in large-cap funds reached $6.44 billion, while a flight to safety saw $39.61 billion redirected towards more secure money market funds.

Charles Schwab's market outlook notes that trade disruptions caused by tariffs and potential inflationary pressures have negatively affected market psychology, with the volatility index (VIX) surpassing the critical 20 threshold at one point. The Michigan consumer confidence survey's increase in one-year inflation expectations lists tariffs among the contributing factors.

Looking into the week ahead, potential market drivers may include monthly inflation data. Although the recent drop in ten-year Treasury yields could benefit the stock market, it ostensibly correlates with lower long-term economic growth expectations. The extent and duration of any tariff increases remain uncertain, as does their economic impact, leading to a re-emergence of volatility in recent weeks as uncertainty mounts.