Stocks tumble on worries of upcoming company profits and higher rates
Stocks tumbled to their worst day in two months Tuesday, buckling under worries about higher interest rates and their tightening squeeze on Wall Street and the economy.
The S&P 500 fell 82 points, or 2%, to close at 3,997 — its sharpest drop since the market was selling off in December. The Dow Jones Industrial Average lost 697 points, or 2.1%, closing at 697, while the Nasdaq composite sank 2.5%.
Home Depot marked one of the S&P 500's larger losses despite reporting stronger profit for the last three months of 2022 than expected. It dropped 5.6% on worries about upcoming earnings after it gave forecasts that fell short of Wall Street's expectations.
The retailer said it would spend $1 billion to increase wages for hourly U.S. and Canadian workers. That fed into broader worries for markets that rising costs for companies have been eating into profits, which are one of the main levers that set stock prices.
The other main lever is also looking precarious as interest rates continue to rise. When safe bonds are paying higher amounts of interest, they make stocks and other investments look comparatively more expensive. Rates have climbed high enough that strategists at Morgan Stanley say U.S. stocks look to be more expensive than at any time since 2007.
The yield on the 10-year Treasury, which helps set rates for mortgages and other important loans, rose further to 3.93% from 3.82% late Friday. The two-year yield, which moves more on expectations for the Federal Reserve, leaped to 4.71% from 4.62%.
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Yields have shot higher this month as Wall Street ups its forecasts for how high the Federal Reserve will take short-term interest rates in its efforts to drive down high inflation. The Fed has already pulled its key overnight rate up to a range of 4.50% to 4.75%, up from basically zero a year ago.
Resilient economy means continued hikes
Several reports have recently come in on the economy that were stronger than expected. On the positive side for markets, they helped allay fears that the economy may soon fall into a recession. But on the negative side, they also give the Fed more reason to stick to the "higher for longer" campaign it's been espousing for interest rates to snuff out inflation.
A resilient economy could keep the pressure up on inflation.
The latest evidence came from a preliminary report Tuesday that suggested business activity is gaining momentum. The services industry likely returned to growth last month and was at an eight-month high, according to S&P Global. Manufacturing, meanwhile, may still be contracting, but the reading hit a four-month high.
Besides dragging on prices for investments, higher rates also slow the economy by making borrowing more expensive and raise the risk of a recession down the line. That's caused the more pessimistic investors on Wall Street to keep their forecasts for a recession but move its timing later into the year.
The Fed said in December that its typical policy maker sees short-term rates rising to 5.1% by the end of this year with the earliest cut to rates happening in 2024. After earlier thinking the Fed would ultimately take it easier on rates than it was saying, Wall Street has largely come into closer alignment with the Fed's view.
The worry is that the Fed could ratchet up its forecasts for rates further next month when it releases its latest projections for the economy. Besides showing the job market and retail sales have been stronger than expected, recent reports on the economy have also suggested inflation is not cooling as quickly and as smoothly as hoped.
Those worries have caused a stall for the strong rally by Wall Street to start the year. After earlier jumping as much as 8.9%, the S&P 500 is now clinging to a gain of 4.9% for the year so far.
