US STOCKS-S&P 500, Nasdaq see muted start to 2026 after last year's robust gains

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Updates with afternoon trading

By Purvi Agarwal and Nikhil Sharma

Jan 2 (Reuters) - The S&P 500 and the Nasdaq pared early gains to trade muted in the first session of the year, as broader market returns were offset by declines in communications stocks, having notched a double-digit rise in 2025.

Industrials .SPLRCI and utilities .SPLRCU were the top boosts to the S&P 500 and the Nasdaq, and were set for their biggest one-day percentage gain in weeks.

Chip stocks also provided a boost, with the Philadelphia SE Semiconductor index .SOX up 3.4%.

The S&P 500 and the Nasdaq, however, reversed course as losses in consumer discretionary stocks, including Amazon AMZN.O, weighed. Tesla TSLA.O slid 1.6% after its annual sales fell for a second year.

Caterpillar CAT.N and Boeing BA.N rose, keeping the Dow afloat.

At 12:19 p.m. ET, the Dow Jones Industrial Average .DJI rose 171.08 points, or 0.36%, to 48,234.37, the S&P 500 .SPX gained 4.36 points, or 0.06%, to 6,849.86 and the Nasdaq Composite .IXIC lost 13.83 points, or 0.06%, to 23,228.16.

The S&P 500 and the Nasdaq are set for their fifth session in the red. It pours water on expectations for a "Santa Claus rally", a seasonal pattern in which markets tend to get a late boost over the last five trading days of December and the first two of January, according to the Stock Trader's Almanac.

The S&P 500 and the Dow were set for their steepest weekly decline in over a month.

All three main indexes ended 2025 with double-digit gains - their third consecutive year in the green, a run last seen during 2019-2021.

The Federal Reserve's monetary policy trajectory will set the tone for global markets in 2026, after recent economic data and expectations of a new dovish Fed chair prompted investors to price in further reductions.

"The next Fed Chair is probably going to be much more dovish than Jerome Powell. So I would imagine that we actually see in the second half of this year that interest rates go down substantially," said Dennis Dick, chief market strategist at Stock Trader Network.

"And that's going to be good for all stocks, not just tech stocks."

A key highlight for January will be next week's labor market data, especially after Powell, at the central bank's December meeting, cautioned against further interest rate cuts until there was more clarity on jobs.

Wall Street had made a stellar comeback in 2025 from April's lows when Trump's 'Liberation Day' tariffs sparked a meltdown in global markets, sent investors away from U.S. stocks and threatened growth by clouding the interest rate outlook.

Tariff surprises from Trump will be on the radar, especially after he signed a proclamation to delay increases in tariffs for upholstered furniture, kitchen cabinets and vanities for another year, the White House said.

Shares of furniture retailers Wayfair W.N, Williams-Sonoma WSM.N and RH RH.N were up 6.5%, 4.8% and 9.1%, respectively.

Advancing issues outnumbered decliners by a 1.75-to-1 ratio on the NYSE and by a 1.51-to-1 ratio on the Nasdaq.

The S&P 500 posted 8 new 52-week highs and 9 new lows while the Nasdaq Composite recorded 41 new highs and 64 new lows.

(Reporting by Purvi Agarwal and Nikhil Sharma in Bengaluru; Editing by Krishna Chandra Eluri)

((Purvi.Agarwal@thomsonreuters.com;))