Stocks are tumbling after a report suggesting flagging economic growth and still-high inflation hurt hopes that have kept Wall Street high recently. A sharp drop for Facebook parent Meta Platforms also dragged the market lower.
Quick Read
- Stock Market Downturn: The U.S. stock market experienced a significant downturn, with the S&P 500 falling by 1.4%, the Dow Jones Industrial Average dropping 563 points (1.5%), and the Nasdaq composite declining by 2.1%. This erased much of the gains from a previously strong week.
- Meta Platforms’ Sharp Decline: Despite reporting higher-than-expected profits, Meta Platforms’ stock plunged 14.1% due to investor concerns over its heavy investments in artificial intelligence and a revenue forecast that disappointed Wall Street expectations.
- Economic Growth and Inflation Concerns: Recent economic reports indicating slower growth and persistent high inflation have dampened investor optimism. The U.S. economy’s growth slowed to an annual rate of 1.6% in the first quarter of 2024, below the anticipated 2.2%, coupled with higher-than-expected inflation rates.
- Impact on Federal Reserve Policy: The economic data suggests challenges for the Federal Reserve, potentially limiting its ability to cut interest rates to stimulate the economy. This has led to a surge in Treasury yields, with the 10-year Treasury yield rising to 4.72% and the two-year yield reaching 5.01%.
- Market Reactions and Adjustments: The likelihood of rate cuts by the Federal Reserve has diminished, with traders adjusting their expectations to possibly just one or two cuts this year. The high interest rates continue to put pressure on the economy and investment prices, affecting companies’ ability to generate higher profits.
- Global Market Responses: The downturn was mirrored in global markets, with Japan’s Nikkei 225 falling by 2.2% amid economic uncertainties, and mixed results observed in other Asian and European markets.
The Associated Press has the story:
Wall Street stumbles after report shows US growth slowed in the 1st quarter
Newslooks- NEW YORK (AP) —
Stocks are tumbling after a report suggesting flagging economic growth and still-high inflation hurt hopes that have kept Wall Street high recently. A sharp drop for Facebook parent Meta Platforms also dragged the market lower.
The S&P 500 was down 1.4% in early trading, slicing off two-thirds of what had been a big winning week so far. The Dow Jones Industrial Average was down 563 points, or 1.5%, and the Nasdaq composite was 2.1% lower.
Meta Platforms, the parent company of Facebook and Instagram, dropped 14.1% even though it reported better profit for the latest quarter than analysts expected. Investors focused instead on big investments in artificial intelligence Meta pledged to make. AI has created a frenzy on Wall Street, but Meta is increasing its spending when it also gave a forecasted range for upcoming revenue whose midpoint fell below analysts’ expectations.
Expectations had built very high for Meta, along with the other “Magnificent Seven” stocks that drove most of the stock market’s returns last year. They need to hit a high bar to justify their high stock prices.
The entire U.S. stock market felt the pressure of another jump in Treasury yields following the disappointing data on the U.S. economy. The report pierced one of the main beliefs that had sent the S&P 500 to multiple records this year: The economy can remain rugged and support strong profits for companies, even if high inflation takes longer than expected to extinguish fully.
Instead, Thursday’s report suggested the U.S. economy’s growth slowed during the first three months 2024 to a 1.6% annual rate from 3.4% at the end of 2023. That was well below forecasts for 2.2% growth.
That by itself would have been disappointing. Making it worse for financial markets, the report also said inflation was hotter during the three months than economists forecast. That could tie the hands of the Federal Reserve, which normally juices sluggish economies by cutting interest rates.
Thursday’s economic data will likely get revised a couple times as the U.S. government fine-tunes the numbers. But the lower-than-expected growth and higher-than-expected inflation is “a bit of a slap in the face to those hoping” for a near-perfect scenario where the economy could escape recession while corralling high inflation, said Brian Jacobsen, chief economist at Annex Wealth Management.
“Things can change a lot from one quarter to the next, so it’s too early to say the Fed has failed, but this doesn’t help their cause.”
Treasury yields surged immediately after the economic report’s release as traders pulled back on bets for cuts to rates this year by the Federal Reserve.
The yield on the 10-year Treasury jumped to 4.72% from 4.66% just before the report and from 4.65% late Wednesday. The two-year Treasury yield, which more closely tracks expectations for the Fed, jumped back above 5% to 5.01% from 4.93% late Wednesday.
Traders are now largely betting on the possibility of just one or maybe two cuts to interest rates this year by the Fed, if any, according to data from CME Group. They came into the year forecasting six or more. A string of reports showing both inflation and the economy remaining hotter than forecast has crushed those expectations.
Top Fed officials themselves have hinted recently that they may need to keep rates high for a while to get full confidence inflation is heading down toward its target. The Fed has been keeping its main interest rate at the highest level since 2001. High interest rates slow the overall economy and hurt prices for investments.
With interest rates looking to stay high for a while, more pressure is on companies to deliver bigger profits.
Southwest Airlines fell 9.5% after the carrier reported worse results for the first quarter than analysts expected. CEO Robert Jordan said the airline was reacting quickly “to address our financial underperformance” and cope with delayed deliveries of new planes from Boeing. It will limit hiring, offer voluntary leave to employees and stop flying to four airports.
In stock markets abroad, Japan’s Nikkei 225 slid 2.2% as investors wait to hear whether the Bank of Japan will make any moves to prop up the tumbling value of the yen.
Indexes were mixed elsewhere in Asia and Europe.
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