Stock futures fall after weak retail earnings affirm inflation fears

Market Trading EssentialsMay 18, 2022

3 minutes read

U.S. stock futures edged lower ahead of the overnight session Wednesday after a weeks-long sell-off on Wall Street deepened in earlier trading as disappointing retail earnings reignited concerns about the impact of inflation.

Futures tied to the S&P 500 fell 0.5% following the index’s worst decline since June 2020, as all but eight stocks in the benchmark closing in negative territory during Wednesday’s session. Contracts on Dow futures erased 0.4% after the index logged a nearly 1,200-point drop on Wednesday to close at its lowest level since March 2021, and Nasdaq futures tumbled 0.8% after the tech-heavy benchmark plunged 4.7%.

These losses followed a bevy of weaker-than-expected quarterly results from big-box U.S. retailers that stoked investor fear about the toll inflationary pressures may take on corporate profits and consumer spending.

Target (TGT) lost a quarter of its market value on Wednesday after the company reported an operating margin far below analyst estimates and cut its full-year outlook, citing higher transportation costs due to rising fuel prices.

“Today’s broad-based market sell-off concerns the ability of companies to pass along higher costs, something that was questioned but which found somewhat of an answer with the retailer’s earnings reports,” LPL Financial Chief Equity Strategist Quincy Krosby said in an email on Wednesday. “To be sure, consumers continue to spend, but many of the top retailers are unable to pass along the higher labor costs and higher prices wrought by a still constrained supply chain.”

Target’s report also follows an earnings miss and forecast cut earlier this week from Walmart (WMT), news that has sent shares of the retail giant down 17% in the last two days, marking the stock’s worst two-day sell-off since 1987.

“Seemingly safe haven stocks, the staples like Target and Walmart, are not immune,” Cresset Capital CIO Jack Ablin told Yahoo Finance Live on Wednesday. “Investors are looking at these stocks and thought that they were safe havens, and now we’re seeing perhaps they weren’t.”

Declines in equity markets Wednesday come on the heels of hawkish remarks from Federal Reserve Chair Jerome Powell at a Wall Street Journal conference earlier this week that strongly signaled two more 50 basis point interest rate hikes were likely in the coming central bank policy-setting meetings.

Uncertainty around the pace and magnitude of the Fed’s rate hiking cycle has stoked pressure across equity markets that has persisted throughout the year as investors worry over the prospect of an economic slowdown if the central bank acts too aggressively. In 2022 so far, the S&P 500 is roughly 18% below its all-time high on Jan. 3, again tip-toeing into bear market territory, while the Dow is down about 14% over the same period and the Nasdaq has fallen deeper into a bear market – 28% below its record closing price in November.

“Chairman Powell’s hawkish comments yesterday afternoon and Target’s shrinking profit margins this morning were too much for the market to handle,” Independent Advisor Alliance CIO Chris Zaccarelli said in an emailed note. “Today’s sell-off shows that growth fears are still gripping investors and this year and the Fed doesn’t have their back.”

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