NEW YORK (AP) — Wall Street got back to slumping Monday to kick off a week full of updates about how bad inflation is and how corporate profits are handling it.
The S&P 500 fell 1.2% and gave up the majority of its gains from the prior week. The Dow Jones Industrial Average slipped 0.5%, and the Nasdaq composite dropped 2.3%.
Stocks of smaller companies were some of the biggest losers, with the Russell 2000 index down 2.1%, as worries about a possible recession continue to dog markets. The highest inflation in four decades is pushing the Federal Reserve to hike interest rates, which puts the clamps on the economy and pushes downward on all kinds of investments.
Parts of the economy are slowing already, though the still-hot jobs market remains a notable exception.
COVID also continues to drag on the global economy. An outbreak of infections is forcing casinos in the Asian gambling center of Macao to shut for at least a week. That sent Wynn Resorts and Las Vegas Sands down more than 6% apiece for some of the larger losses in the S&P 500.
Twitter lost even more, 11.3%, in the first trading after billionaire Elon Musk said he wants out of his deal to buy the social media platform for $44 billion. Twitter said it will take Musk to court to uphold the agreement.
Other big technology companies were also particularly weak. It’s a continuation of this year’s trend, where rising rates most hurt the investments that soared highest earlier in the pandemic.
The struggles pulled the Nasdaq down 262.71 points to close at 11,372.60. The S&P 500 dropped 44.95 to 3,854.43, and the Dow dipped 164.31 to 31,173.84.
In the bond market, a warning signal continued to flash about a possible recession. The yield on the 10-year Treasury slid to 2.98% from 3.09% late Friday as investors moved dollars into investments seen as holding up better in a downturn. It remains below the two-year Treasury yield, which fell to 3.07%.
Such a thing doesn’t occur often, and some investors see it as a sign that a recession may hit in the next year or two. Other warning signals in the bond market that some see as more reliable, which focus on shorter-term yields, still aren’t flashing. But they also are showing less optimism.
Regardless of whether a recession is imminent, investors likely need to brace for much more volatile markets than they’ve become accustomed to over the last 40 years, strategists at BlackRock said Monday.
For decades, an era of “Great Moderation” smoothed out swings in economic growth and inflation and rewarded investors for “buying the dip” whenever prices dropped. Now, with production constraints driving inflation higher, heavy debt levels weighing on economies and “the hyper-politicization of everything” affecting policy decisions, BlackRock strategists say they’re expecting more volatility and shorter time periods between recessions.
“The Goldilocks option is now off the table,” where stocks and bonds can rise in concert, said Wei Li, global chief investment strategist at BlackRock Investment Institute.
The BlackRock strategists say they prefer stocks over bonds for the long term, but that they’re nevertheless shying away from stocks for the next six to 12 months. One reason is that profit margins for companies are at risk of falling from their historically high levels.
Companies this week are set to begin reporting how their profits fared during the spring. Big banks and other financial companies dominate the early part of the schedule, with JPMorgan Chase and Morgan Stanley set for Thursday. BlackRock, Citigroup and Wells Fargo are among those reporting on Friday.
Expectations for second-quarter results seem to be low. Analysts are forecasting 4.3% growth for companies across the S&P 500, which would be the weakest since the end of 2020, according to FactSet.
Even if companies end up reporting better results than expected, which is usually the case, analysts say the heavier focus will be on what CEOs say about their profit trends for later in the year.
The roughly 19% drop for the S&P 500 this year has been due entirely to rising interest rates and changes in how much investors are willing to pay for each $1 of a company’s profit. So far, expectations for corporate profits have not come down much. If they do, that could lead to another leg downward for stocks.
Many on Wall Street expect those expectations to come down.
The recent rise of the U.S. dollar against other currencies adds another challenge to companies already contending with high inflation and potentially weakening demandaccording to Michael Wilson, equity strategist at Morgan Stanley.
One euro is worth close to $1 now, down 15% from a year earlier, for example. That means sales made in euros may be worth fewer dollars than before.
“The main point for equity investors is that this dollar strength is just another reason to think earnings revisions are coming down over the next few earnings seasons,” Wilson wrote in a report.
Beyond earnings updates, reports this week on inflation will likely dominate trading. On Wednesday, economists expect a report to show that inflation at the consumer level accelerated again last month, up to 8.8% from 8.6% in May.
AP Business Writer Yuri Kageyama contributed.