U.S. stocks are falling sharply Tuesday after worse-than-expected inflation data forced investors to question the hopes that have sent Wall Street to record heights. The S&P 500 was 1.3% lower in early trading as traders delayed their forecasts for when the Federal Reserve will deliver the cuts to interest rates they crave so much. The hotter-than-expected inflation report may have put the final nail into hopes that the first cut could arrive in March. It also pushed many forecasts past May into June, according to data from CME Group.
Quick Read
- U.S. stock markets experienced significant declines following unexpected high inflation data, challenging the optimism that had propelled Wall Street to record levels.
- The S&P 500 dropped by 1.3% in early trading, indicating a shift in investor expectations regarding the timing of Federal Reserve interest rate cuts, with many now anticipating delays beyond May.
- The Dow Jones Industrial Average fell by 420 points (1.1%), and the Nasdaq composite saw a steeper decline of 1.8%, influenced by losses in major technology stocks such as Microsoft and Nvidia.
- Smaller companies were hit harder, with the Russell 2000 index dropping by 3%, as higher interest rates could complicate their ability to secure funding.
- Analysts suggest that the surprising inflation figures could not only postpone rate cuts but might also increase the likelihood of further rate hikes by the Fed, which has already elevated its main interest rate to the highest level since 2001 to combat inflation.
- Despite the immediate negative market reaction, some experts, like Chris Larkin of E-Trade from Morgan Stanley, believe the long-term trend towards cooling inflation remains intact, and recent data serves as a reminder of the Fed’s cautious approach to rate cuts.
- Bond yields rose, with the 10-year Treasury yield reaching 4.25% and the two-year yield, more sensitive to Fed expectations, jumping to 4.57%.
- While the immediate outlook suggests a potential for a “perfect landing” for the economy, avoiding recession while waiting for inflation to cool, there are risks of a recession due to sustained high interest rates or a resurgence in inflation due to premature market optimism.
- The market’s recent recalibration of interest rate cut expectations is now more aligned with the Federal Reserve’s projections, which forecast fewer cuts than traders previously anticipated.
- Despite the downturn, some companies like Arista Networks reported strong earnings, though their stock prices still fell, reflecting broader market trends and possibly heightened investor expectations.
The Associated Press has the story:
Wall Street tumbles after worse-than-expected inflation data
Newslooks- NEW YORK (AP) —
U.S. stocks are falling sharply Tuesday after worse-than-expected inflation data forced investors to question the hopes that have sent Wall Street to record heights.
The S&P 500 was 1.3% lower in early trading as traders delayed their forecasts for when the Federal Reserve will deliver the cuts to interest rates they crave so much. The hotter-than-expected inflation report may have put the final nail into hopes that the first cut could arrive in March. It also pushed many forecasts past May into June, according to data from CME Group.
The Dow Jones Industrial Average fell 420 points, or 1.1%, from its record set a day earlier. The Nasdaq composite, which has been flirting with its all-time high set in 2021, sank even more, 1.8%.
High interest rates hurt all kinds of investments, and they tend to particularly hurt high-growth stocks like technology companies. A 2.3% drop for Microsoft and 2.1% fall for Nvidia were two of the heaviest weights on the market.
Stocks of smaller companies fell more than the rest of the market on worries that high interest rates will make it more difficult for them to raise cash. The Russell 2000 index of smaller stocks sank 3%.
Some analysts warned the inflation data could mean not only a delay to rate cuts, it could even raise the possibility that the Fed would raise rates further. The Fed has already pulled its main interest rate to the highest level since 2001 in hopes of grinding out high inflation. High rates work by slowing the overall economy and hurting prices for investments.
But it’s still just one data point, which followed several months of encouraging trends where inflation eased, said Chris Larkin, managing director, trading and investing, at E-Trade from Morgan Stanley.
“Until proven otherwise, the longer-term cooling inflation trend is still in place,” he said. “The Fed had already made clear that rate cuts weren’t going to happen as soon as many people wanted them to. Today was simply a reminder of why they were inclined to wait.”
Still, the reaction across Wall Street was immediate and negative.
Yields jumped in the bond market as traders built up expectations that the Fed will keep interest rates high for longer. The yield on the 10-year Treasury rose to 4.25% from 4.18% late Tuesday.
The two-year yield, which moves more on expectations for the Fed, leaped to 4.57% from 4.47%.
Even after the surprising inflation report, the likeliest outcome is still for the economy to manage a perfect landing and to avoid a painful recession while waiting for inflation to cool to the Fed’s target, said Alexandra Wilson-Elizondo, co-chief investment officer of the multi-asset solutions business in Goldman Sachs Asset Management.
But she said there is still risks that conditions could swing to one of two extremes: Either the economy falls into a recession under the weight of high interest rates, or inflation reaccelerates because of how much stock prices have already climbed and Treasury yields have already fallen on expectations that cuts to rates are coming soon.
The forced recalibration among traders for rate cuts is actually bringing Wall Street’s expectations closer to what the Federal Reserve has been outlining. Fed officials are generally penciling in three cuts to rates this year, as inflation hopefully continues to cool toward its 2% target from the peak above 9% two summers ago.
Earlier, traders were forecasting as many as six cuts to arrive in 2024, which helped stocks to go on a tremendous run since Halloween where the S&P 500 has climbed in 14 of the past 15 weeks. Now, they’re largely betting on three or four.
Critics have been warning that stock prices may have climbed too far, too fast given the risks for a reacceleration in inflation and for a slowdown in the economy. On the upside for markets recently, more companies than usual have been beating analysts’ forecasts for profits in the latest quarter.
Arista Networks joined that parade after reporting stronger earnings and revenue for the latest quarter than expected. But its stock nevertheless sank 4.8%. Analysts said investors may have been expecting an even better forecast for the company for upcoming results after it rose nearly 20% for the year so far.
In stock markets abroad, indexes 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 gained 1.1%.
