NEW YORK – Stocks on Wall Street slumped on Friday as concerns over interest rates overshadowed an encouraging start to the earnings season for large US companies.
The S&P 500 fell 8.58 points, or 0.2%, to 4,137.64 after giving up an early gain. The Dow Jones Industrial Average lost 143.22, or 0.4%, to 33,886.47, while the Nasdaq Composite was down 42.81, or 0.4%, to 12,123.47.
The S&P 500 has still squeezed out a fourth week of gains in the last five, buoyed in part by hopes that the Federal Reserve may soon end its spate of rate hikes as inflation cools. High interest rates can dampen inflation, but only by slowing the economy, increasing the risk of a recession and raising investment prices.
A senior Fed official dampened those hopes on Friday after saying inflation was way too high and further tightening may be needed. Christopher Waller, a member of the Fed’s board of directors, also said that even after rate hikes have ended, they will likely have to stay higher longer than markets are expecting.
Following his comments, traders clinched bets that the Fed will hike rates at its next meeting in May instead of taking its first pause in more than a year. According to data from CME Group, some also began betting that the Fed could hike rates again in June.
High-growth stocks tend to suffer the most from high interest rates, and big tech stocks were among the heaviest weights in the S&P 500. Microsoft fell 1.3%.
Much of the economy has already begun to slow under the weight of higher interest rates, raising concerns that a recession may be likely. A report on Friday showed that US shoppers cut spending at retailers more-than-expected last month. Much of that was due to falling gasoline prices, and the decline in what economists call “core retail sales” wasn’t as bad as forecast.
“The Fed’s challenge was to cool inflation without freezing the economy,” said Mike Loewengart, head of model portfolio construction at Morgan Stanley Global Investment Office. “The momentum is still playing out in the markets and we may see more choppy price action as a result.”
Potentially more difficult for the Fed was another report on Friday that said US households are bracing for higher inflation. According to a preliminary survey by the University of Michigan, consumers expect inflation to come in at 4.6% next year, up from 3.6% expectations last month.
That could be problematic, as the Fed has long feared that stalled expectations of high inflation could create a vicious cycle that keeps them elevated. However, longer-term inflation expectations remain stable at 2.9% for the fifth straight month, according to the survey.
All the worries helped push government bond yields higher. The 10-year Treasury yield rose to 3.51% from 3.45% late Thursday. It helps set interest rates on mortgages and other major loans.
The two-year Treasury yield is moving more in line with expectations for the Fed and its gain was stronger, from 3.97% to 4.10%.
Big gains by some of the country’s largest banks helped offset some interest rate concerns. They reported earnings for the first three months of the year that beat expectations.
They helped usher in earnings season for large US companies, where expectations are mostly gloomy. Despite those worries, JPMorgan Chase rose 7.6% after its earnings rose more than half year over year.
It benefited from the stresses that emerged in the banking system last month, rocking global markets. These concerns prompted some customers to withdraw cash from smaller banks and transfer it to larger ones.
Citigroup rose 4.8% after also reporting stronger-than-expected earnings. BlackRock, the world’s largest wealth manager, rose 3.1% after earnings also beat forecasts.
Boeing was one of the heaviest weights in the S&P 500, with its stock slipping 5.6% after the planemaker said on Thursday that production and deliveries of a “significant number” of its 737 Max planes have been delayed due to questions about a supplier’s work could delay hulls.
Boeing said supplier Spirit AeroSystems used a “non-standard manufacturing process” when installing hardware near the tail of some 737s. Boeing said the situation is not an immediate safety concern and planes that are already flying “can continue to operate safely.”
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