Wall Street rally fades as corporate earnings reports rise

Stocks closed lower on Wall Street on Monday after an early rally evaporated mid-afternoon, marking a choppy start to a week full of updates on the two elements that set stock prices. equities: corporate earnings and the direction of interest rates.

The S&P 500 fell 0.8% after rising 1% at the start. The index broke a five-day losing streak late last week. Gains by energy producers, large retailers and other companies that rely on consumer spending were offset by declines in healthcare and technology stocks. Goldman Sachs rose after reporting better-than-expected spring earnings.

The Dow Jones Industrial Average fell 0.7% and the Nasdaq composite lost 0.8%.

“It was a pretty big gain earlier in the day, and it’s all gone,” said Liz Young, head of investment strategy at SoFi.

Young expects the market to remain volatile through July, primarily due to the earnings season. Johnson & Johnson, American Airlines and Tesla are among dozens of S&P 500 companies expected to release quarterly snapshots this week.

“This is the first earnings season of the cycle where we’re likely going to get some pretty negative guidance and we’re going to hear about where companies are in a hurry and they’re going to change their outlook,” she said.

The S&P 500 fell 32.31 points to 3,830.85. The Dow slipped 215.65 points to 31,072.61 and the Nasdaq fell 92.37 points to 11,360.05. The Russell 2000 Small Business Index also fell. It fell 5.96 points, or 0.3%, to 1,738.42.

The afternoon reversal is the latest episode of volatile trading for the market, which has been falling mostly for weeks on fears that the Federal Reserve and other central banks around the world may be dragging down the economy too hard in the hope of bringing down high inflation. If they are too aggressive in their interest rate hikes, they could cause a recession.

“The Fed wants inflation data to go down and they’re not going to retract their claws until that happens,” Young said. “Pretty soon, the narrative will turn into ‘is the Fed going too far?'”

Still, some on Wall Street see signs of at least temporary optimism. Oil prices slipped off their highs, although U.S. crude rose 5.1% on Monday. A key report released last week also indicated that inflation expectations are falling among households. This could prevent a vicious circle from taking root and ease the pressure on the Federal Reserve.

Expectations about how aggressively the Federal Reserve will raise interest rates at its meeting next week have diminished. Traders are now betting on around a one in three chance of a monstrous full percentage point rise, with the majority favoring a 0.75 percentage point rise. As late as Thursday, the big bet was on a full point hike.

Economists at Goldman Sachs are among those forecasting a 0.75 point increase, which would match last month’s rise, instead of a more aggressive rise. They cited in particular the easing of inflation expectations after Chairman Jerome Powell said last month that the Fed was paying close attention.

Across the Atlantic Ocean later this week, investors expect the European Central Bank to raise interest rates for the first time in 11 years on Thursday to fight inflation. Many investors expect a 0.25 percentage point increase, “but more is not unthinkable,” the economists wrote in a BofA Global Research report.

Interest rates are one of the two main levers that set stock prices. The other is corporate earnings, which are at risk given high inflation and slowdowns in parts of the economy. For now, at least, analysts still expect continued growth.

Earnings season kicked off last week and banks dominated the first part of the calendar to report how much they earned from April to June.

Goldman Sachs was among the last to report, and it rose 2.5% after earnings and revenue came in better than analysts expected. Synchrony Financial rose 0.3% after also beating profit and revenue forecasts.

Bank of America closed essentially flat after falling short of analysts’ earnings expectations. Despite all the worries about a possible recession, Bank of America said spending and customer deposits remained strong.

In overseas markets, Hong Kong’s Hang Seng Index jumped 2.7% after Chinese media reported that some stalled property projects had resumed construction after buyers threatened to halt mortgage payments. Shanghai shares gained 1.6%.

Equities also rose across much of the rest of Asia and Europe, with the German DAX posting a return of 0.7%.

In the bond market, the 10-year Treasury yield rose to 2.98% from 2.96% on Friday night. The two-year yield, which rose to 3.17%, is still above the 10-year yield. Some investors see this as a worrying sign that could portend a recession in a year or two.

Concerns about a recession have been underscored by recent reports showing slowdowns in parts of the economy due to Fed rate hikes.

The housing market, in particular, felt the impact of higher mortgage rates. A measure of homebuilder sentiment released on Monday weakened more than economists expected and fell to its lowest level in more than two years.

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