Wall Street posted sharp losses and bond yields stabilized as investors digested corporate earnings reports and prepared for tighter monetary policy from the Federal Reserve.
Losses in the three major US indexes were broad-based. The Dow Jones Industrial Average closed down 2.8%, or about 981.36 points. The S&P 500 dropped 2.7%, while the technology-heavy Nasdaq Composite fell 2.5% or 335.36 points.
A flurry of selling reflected nerves as plans to rapidly raise interest rates dragged the Dow industrials to their worst day since 2020.
“The market had seemed to have adjusted to a faster pace of hikes, but the view is now that, if Fed Chairman Jerome Powell is happy with 50 basis points, then it gives cover for others to call for even faster tightening,” said Chris Beauchamp, chief market analyst at online trading platform IG.
“This has cut the foundations from underneath the rally in stocks over recent days, and suggests that the second half of April will be just as tough as the first for most equities.”
12.05 pm: S&P 500 on track for third-straight losing week
US stocks fell in noon trading as the 10-year Treasury yield neared a three-year high of 2.94% and some corporate financial results disappointed investors.
At midday, the Dow lost 611 points to 34,182, while the S&P 500 eased 77 points at 4,316 and the tech-heavy Nasdaq slipped 203 points to 12,972.
“The big tech names are still reeling from Netflix’s earnings, but the pain isn’t over it,” IG chief market analyst Chris Beauchamp said.
“While the sector is relatively quiet today, next week’s earnings may spark another cycle of selling,” Beauchamp added.
Notable movers included shares of Gap Inc (NYSE:GPS), which sank more than 17% after the specialty apparel retailer cut its net sales growth outlook for fiscal 2022.
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2.45pm: US shares start lower
US stocks slipped at the open on the last trading day of the week as investor sentiment took a hit on fears of a bigger than expected interest rate hike from the US central bank in May.
The Dow Jones Industrial Average started around 202 points lower in New York to stand at 34,590. The S&P 500 lost around 16 at 4,376, while the tech-laden Nasdaq dropped nearly 11 points at 13,163.
"We have seen some big moves across the financial markets in the aftermath of hawkish commentary from the Fed as traders dumping equities, precious metals and commodity currencies," said Fawad Razaqzada, market analyst at City Index and FOREX.com.
"Jerome Powell has more or less now confirmed that the Fed will hike by 50-bps at their next meeting. But there’s even talk of 75 basis point hikes in the upcoming meetings.
"This is what is spooking equity market bulls, especially on US technology sector where the dividend yields are low and becoming increasingly less attractive as government bond yields continue to rise."
It all piles on the pressure ahead of big tech earnings from the likes of Alphabet, Microsoft, Apple and Amazon, which are due to report their quarterly results in the week ahead and for which expectations have been tempered due to continued inflation and price headwinds.
6.30am: US stocks set to open lower
US stocks were expected to open lower on Friday closing out a week in which corporate earnings showed signs of faltering and the Federal Reserve gave perhaps the strongest signal yet that interest rates in the world’s biggest economy are set to rise rapidly.
In comments that led to falls in stock prices and rises in bond yields on Thursday, Fed chairman Jerome Powell signaled that he would be comfortable with a 50 basis point increase in interest rates at the next rate-setting meeting in response to a tight labor market and steep inflationary pressures. Many commentators are worried that higher interest rates may not work to dent inflation but may instead dampen economic activity, leading to a period of low growth alongside elevated levels of inflation.
Futures for the Dow Jones Industrial Average shed 0.35% in pre-market trading on Friday, while those for the broader S&P 500 index were down 0.36% and contracts for the tech-heavy Nasdaq 100 lost 0.41%.
“Federal Reserve Chairman Powell stopped an intraday equity rally in its tracks overnight, after he signaled a 0.50% rate hike in May and that he was not unamenable to ‘front-loading’ more 0.50% rate hikes,” said Jeffrey Halley, senior market analyst at OANDA.
“The pre-FOMC Fed speaker blackout starts tomorrow, and it looks like they are thin on the ground today. That just leaves US PMIs as the main point of interest tonight data-wise. A high print should keep the hiking noise going, while a low print could bring some relief to bond and equity markets into the weekend,” he added.
The PMIs for the US services and manufacturing sectors in March are due at 9.30 am ET. Estimates point to continued growth but at a slower pace than in the previous month.
Investors also continue to digest corporate earnings which, so far, have been on the disappointing side. While net profit at Tesla Inc (NASDAQ:TSLA) rose seven-fold, Netflix Inc (NASDAQ:NFLX) reported a 200,00 drop in its subscribers and warned of further falls, spooking investors about waning consumer demand.
American Express is due to release first-quarter results today.
Elsewhere, oil prices were lower with concerns about slowing production in Russia being outweighed by fears that economic activity in China will slow down. Benchmark Brent crude futures were down 1.68% at $106.51 a barrel, while WTI was 1.78 % lower at $101.94 a barrel.
Contact the author at jon.hopkins@proactiveinvestors.com