U.S. stocks declined on Tuesday as comments from Federal Reserve Chair Jerome Powell dashed investor hopes for imminent interest rate cuts. The remarks sent Treasury yields higher and weighed on rate-sensitive sectors like technology and consumer stocks.
Dow Drops Over 450 Points
The Dow Jones Industrial Average fell 453 points, or 1.4%, to close at 32,732. The S&P 500 dropped 1.3% to end the day at 4,017, while the tech-heavy Nasdaq Composite declined 1.0% to 11,994.
Declines were broad-based, with all 11 S&P 500 sectors ending lower. Cyclical groups like consumer discretionary and technology were among the biggest losers on dampened economic optimism.
Powell said in a live interview that interest rates would need to be held at higher levels, sending Treasury yields surging. The benchmark 10-year yield topped 3.6%, its highest since November.
Higher borrowing costs threaten to cool economic activity and hurt stock valuations, especially for high-growth tech names. Shares of megacaps Apple and Microsoft both fell around 2%.
Rate Cut Hopes Fade
In his first public appearance since last week’s strong jobs report, Powell noted the “disinflationary process has started” but stressed that ongoing rate hikes were still appropriate to ensure inflation continued trending down.
Investors had hoped the Fed chief would signal room for rate cuts later this year. But his resolute tone suggested policymakers remain squarely focused on bringing inflation back down to 2% target before easing policy.
Futures markets are now pricing in rate cuts starting only in December, instead of September as previously expected.
The continued policy tightening threatens an economic “hard landing” and potential recession, though Powell said he did not believe that would happen.
Market Volatility Here to Stay
With uncertainties still clouding the economic outlook, analysts say stocks could remain choppy in coming weeks.
“Markets are clearly struggling with opposing reads on the economy and Fed policy currently,” said Mike Loewengart, head of model portfolio construction at Morgan Stanley Global Investment Office.
He expects “a volatile back and forth” until more clarity emerges on whether corporate earnings can weather higher rates and consumers can sustain spending amid elevated inflation.
Other strategists echoed that sentiment. “We’re likely to see volatility persist in the near-term until we get greater clarity on whether we’re likely to see a recession or not,” said David Bianco, chief investment officer for the Americas at DWS Group.
Eyes on Big Tech Earnings
Markets face a key test this week with a flood of high-profile earnings reports. Nearly 200 S&P 500 companies are slated to report results, including big tech titans Alphabet, Amazon and Meta Platforms.
With valuations still elevated after last year’s sell-off, investors will be scrutinizing results and guidance closely for signs of economic impact.
“I don’t think the market wants earnings to be too strong,” said Ellen Hazen, chief market strategist at F.L.Putnam Investment Management. “Strong earnings would indicate the Fed keeps going.”
Lackluster results, on the other hand, could revive hopes for a Fed pivot and reignite the rally that marked the start of the year.
So far this earnings seasons, companies have largely exceeded subdued expectations. But executives remain cautious on 2023 projections amid the uncertain macro backdrop.
Overall, strategists expect heightened volatility to persist for stocks until concrete signs emerge that the Fed is winning its battle with inflation. For now, Powell has indicated the central bank remains resolute in its tightening campaign.
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