U.S. stocks are falling sharply on Tuesday after worse-than-expected inflation data forced investors to question the hopes that have propelled Wall Street to record highs.
The S&P 500 was down 1.4% in morning trading as traders delayed their forecasts on when the Federal Reserve would implement the interest rate cuts they crave. THE inflation report hotter than expected may have put the final nail in the hope that the first cut might arrive in March. It also pushed many forecasts beyond May into June, according to CME Group data.
The Dow Jones Industrial Average fell 532 points, or 1.4%, from its record high set the day before. The Nasdaq Composite Index, which was flirting with its all-time high set in 2021, fell even further, by 1.9%, as of 10:15 a.m. Eastern Time.
High interest rates hurt all types of investments, and they tend to particularly harm high-growth stocks like technology companies. A 2% drop for Microsoft and 1.5% for Nvidia were two of the heaviest weights in the market.
Losses were widespread, with more than 90% of S&P 500 stocks collapsing. Shares of smaller companies have fallen even more than the rest of the market because high interest rates could hurt them more than their larger rivals by making it harder to borrow cash. The Russell 2000 index of small stocks fell 3.8%.
Some analysts have warned that the inflation data could mean not only a delay in cutting rates, but also the possibility that the Fed could raise rates further. The Fed has already cut its main interest rate to the highest level since 2001 in hopes of curbing high inflation. High rates have the effect of slowing down the overall economy and hurting investment prices.
But it's still just one data point, following several months of encouraging trends where inflation has eased, said Chris Larkin, managing director of trading and investments at E-Trade at Morgan Stanley.
Until proven otherwise, the long-term trend of slowing inflation is still in place, he said. The Fed had already made it clear that rate cuts would not happen as soon as many would like. Today was simply a reminder of why they were inclined to wait.
Yet the reaction on Wall Street was immediate and negative.
Yields jumped in the bond market as traders expected the Fed to keep interest rates high for longer. The 10-year Treasury yield rose from 4.18% to 4.26% Tuesday evening.
The two-year Treasury yield, which moves more in line with Fed expectations, jumped to 4.59% from 4.47%.
Even after the surprising inflation report, the most likely outcome remains that the economy makes a perfect landing and avoids a painful recession while it waits for inflation to subside, said Alexandra Wilson-Elizondo, co-chief investment officer. of the multi-asset solutions business. in Goldman Sachs asset management.
But she added that there is still a risk that conditions could tip into one of two extremes: either the economy falls into recession under the weight of high interest rates, or inflation re-accelerates due to rising stock prices and falling Treasury yields. on expectations regarding future rate cuts.
The forced recalibration by traders for rate cuts actually brings Wall Street's expectations closer to those outlined by the Federal Reserve. Fed officials said earlier they expect three rate cuts this year, as inflation hopefully eases toward its 2% target, following its peak above 9% a year ago. has two summers.
Previously, traders predicted up to six cuts would arrive in 2024, which has seen stocks see a tremendous run since Halloween. The S&P 500 has climbed in 14 of the last 15 weeks. Now, traders are largely betting on three or four reductions this year.
Critics have warned that stock prices may have climbed too far, too fast, given overly optimistic hopes of deep cuts, as well as risks of reaccelerating inflation and a slowing economy. Bullish for markets recently, most companies beat analysts' profit forecasts in the last quarter.
Arista Networks joined this parade after reporting higher-than-expected earnings and revenue for the latest quarter. But its stock nevertheless fell 6.5%. Underscoring once again the power of high expectations, analysts said its stock may have fallen because investors expected it to give better forecasts for upcoming results after its stock rose closely by 20% for the year so far.
Moody's fell 6.6% after the ratings company reported weaker earnings for the latest quarter than Wall Street had expected.
Hasbro fell 5.4% after the toy company reported results for the final three months of 2023 that were weaker than analysts expected.
On the winning side of Wall Street, JetBlue Airways soared 12.9% after activist investor Carl Icahn revealed he had acquired a stake in the airline and said he considered the stock undervalued.
On foreign stock markets, indices fell across Europe. In Asia, markets were closed in China for holidays, but Japan's Nikkei 225 jumped 2.9% and South Korea's Kospi 1.1%.
AP Business writers Matt Ott and Yuri Kageyama contributed.
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