Markets are pricing in three or four interest-rate increases from the Federal Reserve this year.
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The Nasdaq ended Wednesday in correction territory, an about-face from its upbeat start to the trading session. Everything, in fact, dropped by the closing bell: the S&P 500, the Dow, and even bond yields.
The tech-heavy Nasdaq Composite closed at 14,340.26, declining 1.2% after gaining as much as 1%. The last correction came last March, when the index fell 10.5% at its correction low of 12,609. Its record close of 16,057.44 was set on Nov. 19
The Dow Jones Industrial Average dropped 339 points, or 1%. The S&P 500 fell 1%, too. Both, like the Nasdaq, were up earlier.
Stocks had a good morning as the 10-year Treasury yield dipped, ending the day 1.84%, from 1.88% Tuesday. The momentary slide in the yield should be good for stocks; lower long-dated bond yields make future profits more valuable.
But that hasn’t been the story of late.
The 10-year yield had climbed from a Friday close of 1.79% and has surged from 1.51% to close 2021. This comes as stubbornly high inflation has prompted the Federal Reserve to plan interest rate increases and a reduction of its balance sheet this year.
That has clobbered tech stocks because many tech companies are investing today to create sizable profits many years into the future. The Nasdaq is now down 10.7% from its all-time high hit in late November, putting it technically into correction territory.
And there’s a strong possibility that bond yields keep moving higher from here. The yield on the 10-year Treasury note is still below the expected 2.45% annual rate of inflation for the longer-term—and investors usually demand a higher rate of return than the inflation rate.
“I do think we’re likely to cross the 2% [10 year yield] level some time in the first quarter,” said Mark Heppenstall, chief investment officer at Penn Mutual Asset Management. “I just think that the Fed is going be moving [on tightening policy].”
That could mean more pain for tech stocks. “Inflation and interest rate concerns are going nowhere soon and with traders now increasingly considering the possibility of [interest rate] hikes larger than 25 basis points, the possibility of more pain in stock markets is very real,” wrote Craig Erlam, senior market analyst at Oanda.
In any event, with bond yields settling down—for the moment—earnings reports might have a chance to bring stocks higher.
“With a market trading at elevated multiples, earnings growth is essential as there will likely be little to no multiple expansion in 2022,” said Richard Saperstein, chief investment officer at Treasury Partners.
Over the next three weeks, more than 300 S&P 500 companies will report fourth-quarter earnings, according to Credit Suisse. So far, about 8% of the index’s market capitalization has reported and companies are already beating earnings estimates; the aggregate earnings result has been almost 6% above expectations, with about three quarters of companies topping forecasts.
Earnings for some of those high-profile tech names, specifically, will trickle in. Through Feb. 1, Netflix (ticker: NFLX), Microsoft (MSFT), Tesla (TSLA), Apple (AAPL), Alphabet (GOOGL) and PayPal (PYPL) will report.
Overseas, London’s FTSE 100 was 0.4% higher as markets shrugged off data showing U.K. consumer-price index inflation jumped 5.4% year-over-year in December—the highest level in three decades. In Asia, Tokyo’s Nikkei 225 dropped 2.8%, matching the Nasdaq’s Tuesday tumble.
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In the commodity space, oil continued its steady march higher, well into seven-year high territory. Recent supply concerns amid geopolitical tensions have helped support prices, and the outlook from the International Energy Agency (IEA) is strong. The IEA said Wednesday that global demand for crude is expected to exceed prepandemic levels this year.
Futures for West Texas Intermediate crude rose 1.2% to above $86 a barrel.
Here are five stocks on the move Wednesday:
Morgan Stanley (MS) stock gained 1.9% after the company reported a profit of $2.01 a share, beating estimates of $1.91 a share, on revenue of $14.5 billion, below expectations for $14.6 billion.
Bank of America (BAC) stock rose 0.4% after the company reported a profit of 82 cents a share, beating estimates of 76 cents a share, on revenue of $22.17 billion, below expectations of $22.2 billion.
Cisco (CSCO) stock fell 1.4% after getting downgraded to Neutral from Buy at Goldman.
Toll Brothers (TOL) stock dipped 4.8% after getting downgraded to Underweight from Sector Weight at KeyBanc.
Pharma group GlaxoSmithKline (GSK) was down 2.3% after announcing its chief scientific officer, Hal Barron, would leave his role in August to take the role of CEO at private U.S. biotech firm Altos Labs.
Write to Jack Denton at [email protected] and Jacob Sonenshine at [email protected]
