US January nonfarm payrolls were 130K versus a 70K consensus, nearly doubling expectations. After an early rise, the Nasdaq Composite fell 0.25% by lunchtime, while the Dow Jones and S&P 500 were broadly flat.
January payroll growth improved from December’s revised 48K, and the unemployment rate dipped 0.1 percentage points to 4.3%. Market pricing for the next US rate cut moved from June to July, and a Federal Reserve official pointed to keeping policy restrictive as inflation nears 3%.
Rates Cut Outlook Shifts
Several non-AI technology and related shares fell after earnings updates. Stocks mentioned included Robinhood (HOOD), Shopify (SHOP), Lyft (LYFT), Astera Labs (ALAB) and Unity Software (U).
Astera Labs dropped 20%, with attention on future gross margins and a partnership with Amazon (AMZN). Unity fell 30% on its revenue guidance, while Robinhood slid 13% after missing quarterly revenue.
Centrus Energy (LEU) fell 19% after missing quarterly expectations. Shopify dropped 13% after forecasting Q1 free cash flow in the “low to mid-teens”, versus a 17% margin expected by Wall Street.
With the January jobs report coming in strong, our expectations for a Federal Reserve rate cut have been pushed from June to July. The market reflected this immediately, with the 2-year Treasury yield jumping 15 basis points to 4.55% as traders priced in higher rates for longer. This suggests traders should consider strategies that benefit from this delay, such as buying puts on interest rate sensitive bond ETFs.
Tech Sector Rotation Deepens
We are seeing a clear and “violent” split in the technology sector, where non-AI companies are being punished while AI-centric firms hold up. This rotation is reminiscent of the valuation reset we witnessed back in 2022, creating opportunities for pairs trades. Consider buying calls on a basket of AI leaders while simultaneously buying puts on ETFs that track traditional software, like the iShares Expanded Tech-Software Sector ETF (IGV).
The dramatic single-day drops in stocks like Unity Software (U) by 30% and Astera Labs (ALAB) by 20% highlight the market’s new focus on profitability and AI-driven threats. For traders, this means buying put options on non-AI tech companies that have yet to report their earnings could be a valuable strategy. These large moves show that implied volatility, while high, may not fully capture the downside risk for companies offering weak guidance.
Even though broad market indexes like the S&P 500 seem calm, there is significant turmoil under the surface. The CBOE Volatility Index (VIX) is currently trading at a relatively low 15, which likely underprices the risk of this severe sector rotation. This environment makes buying protection on specific vulnerable sectors more appealing than on the broader market indices.
