NEW YORK (AP) – Wall Street fell again on Monday to begin a week full of updates on how bad inflation is and how corporate profits manage it.
The S&P 500 fell 1.2% and gave up most of last week’s gains. The Dow Jones Industrial Average fell 0.5% and the Nasdaq fell 2.3%.
Shares of smaller firms were some of the biggest losers, with the Russell 2000 index falling 2.1% as concerns about a possible recession continue in dog markets. Higher inflation in four decades is pushing the Federal Reserve to raise interest rates, slowing the economy and pushing down all kinds of investment.
Parts of the economy are already slowing, although the still-hot labor market remains a notable exception.
COVID also continues to drag the global economy. An outbreak of infections is forcing Macau’s Asian gambling center casinos to close for at least a week. This caused Wynn Resorts and Las Vegas Sands to fall more than 6% each due to some of the biggest losses in the S&P 500.
Twitter lost even more, 11.3%, in the first negotiation after billionaire Elon Musk said he wants to get out of his deal to buy the social media platform for $ 44 billion. Twitter said it will take Musk to court to uphold the deal.
Other large technology companies were also especially weak. It is a continuation of this year’s trend, where rising rates further hurt investments that skyrocketed earlier in the pandemic.
The fights pushed the Nasdaq down 262.71 points to close at 11,372.60. The S&P 500 fell 44.95 to 3,854.43, and the Dow fell 164.31 to 31,173.84.
In the bond market, it continued to flash a warning sign about a possible recession. The 10-year Treasury yield fell to 2.98% from 3.09% on Friday afternoon as investors shifted dollars to investments that were considered to hold better in a recession. It remains below the two-year Treasury yield, which fell to 3.07%.
This doesn’t happen often, and some investors see it as a sign that a recession may be coming in the next year or two. Other warning signs in the bond market that some consider more reliable, focusing on short-term returns, are not yet flickering. But they also show less optimism.
Regardless of whether a recession is imminent, investors will likely have to prepare for much more volatile markets than they have been accustomed to over the past 40 years, BlackRock strategists said Monday.
For decades, an era of “great moderation” softened changes in economic growth and inflation and rewarded investors for “buying the decline” whenever prices fell. Now, with production constraints pushing inflation higher, heavy debt levels weighing on economies and the “hyperpoliticization of everything” that affects policy decisions, BlackRock strategists say they expect more volatility and periods of shorter times between recession.
“The Goldilocks option is now off the table,” where stocks and bonds can rise in a concerted manner, said Wei Li, global investment strategist at the BlackRock Investment Institute.
BlackRock strategists say they prefer stocks to long-term bonds, but still move away from stocks over the next six to 12 months. One reason is that companies ’profit margins run the risk of falling from their historically high levels.
Companies this week will begin reporting on how their profits have fared over the spring. Big banks and other financial companies dominate the first part of the calendar, with JPMorgan Chase and Morgan Stanley scheduled for Thursday. BlackRock, Citigroup and Wells Fargo are among those reported Friday.
Second quarter earnings expectations appear to be low. Analysts forecast 4.3% growth for S&P 500 companies, which would be the weakest by the end of 2020, according to FactSet.
Even if companies end up reporting better-than-expected results, which is often the case, analysts say more attention will be focused on what CEOs say about their profit trends by the end of ‘year.
The fall of about 19% in the S&P 500 this year has been entirely due to rising interest rates and changes in the amount investors are willing to pay for every dollar of a company’s profits. So far, business profit expectations have not dropped much. If they do, this could lead to another downward leg for stocks.
Many on Wall Street expect these expectations to drop.
The recent rise of the US dollar against other currencies adds another challenge to companies already struggling with high inflation and potentially weakened demand, according to Michael Wilson, Morgan Stanley equity strategist.
One euro is worth about a dollar now, 15% less than a year ago, for example. This means that sales made in euros can be worth less dollars than before.
“The main point for equity investors is that this strength of the dollar is just another reason to think that earnings revisions will go down over the coming earnings seasons,” Wilson wrote in a report.
Beyond earnings updates, this week’s reports on inflation are likely to dominate trade. On Wednesday, economists expect a report to show that consumer-level inflation accelerated again last month, to 8.8% from 8.6% in May.
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AP business writer Yuri Kageyama contributed.