Stocks did an about-face Thursday, tumbling after a key bond yield spiked—ever so briefly—and the Federal Reserve chief made clear that a half-point interest rate increase is “on the table” for May.
There was a bit of good news: earnings across the board keep beating Wall Street’s expectations.
All three major indexes finished in the red. The
Dow Jones Industrial Average
slipped 368 points, or 1.1%. The
dropped 1.5%. The
declined 2.1% after having been up more than 1% earlier.
The 10-year Treasury yield rose to as high as 2.95%, which would have marked a pandemic-era closing high. The yield, though, the yield closed at 2.9%. Stocks sold off just as the spike started.
Markets are still worried that the yield could still move a bit higher, partly because the Fed is expected to reduce its bondholdings, which lowers bond prices and lifts bond yields, to bring down inflation.
Rising long-dated yields are particularly damaging to the tech-heavy Nasdaq. Many tech stocks are growing quickly, so their valuations reflect a relatively long-term stream of future profits—and higher bond yields make future profits worth less. In the morning, the 10-year yield had slipped to 2.87%, powering technology stocks higher, before the gains faded when the yield popped.
The 2-year yield also shot higher, up to 2.72% before closing at 2.69%, still a pandemic-era closing high.
That comes as the Fed is raising short-term interest rates, one of the more pronounced threats to economic and earnings growth. Speaking at an IMF panel Thursday, Fed Chair Jerome Powell reiterated that a May interest rate hike of 50 basis points, higher then the standard 25 basis points, remains a possibility.
“It just seems like we’ve seen this pattern before with rates up and pressure on equities,” said Charlie Ripley, senior investment strategist for Allianz Investment Management. “Part of it is the market adjusting to a higher rate regime.”
For the moment, though, earnings growth looks solid.
With almost a fifth of the S&P 500’s market capitalization having reported earnings for the first quarter of the year, the aggregate earnings per share result has beaten the estimate by 8.6%, according to Credit Suisse data. Three-quarters of companies are beating expectations by any margin.
Companies that beat profit expectations are seeing their stocks outperform the S&P 500’s movement by 0.2 percentage points, according to Wells Fargo data. That wasn’t hurting the market, but it also wasn’t enough to bring stocks higher.
Markets are trying to size up the potential hit to profit growth from higher interest rates at a time when stocks are already expensive. The aggregate multiple on next year’s earnings per share projection for the S&P 500, at 19 times, implies that investors get a 5.3% earnings yield for every dollar they invest. That’s less than three percentage points more than the yield on the safe 10-year Treasury bond, which is historically low—and unattractive.
“The US first-quarter earnings season has gotten off to a solid start,” wrote Mark Haefele, chief investment officer of global wealth management at UBS. “But with heightened uncertainty over the pace of monetary tightening and the war in Ukraine, we recommend a neutral stance on equities overall.”
Overseas, the pan-European
rose 0.3%, and Tokyo’s
ended 1.2% into the green.
Five stocks on the move:
(ticker: TSLA) stock jumped 3.2% after the electric-vehicle maker earned $3.22 per share from $18.8 billion in sales in the first quarter of the year. The record results firmly outpaced Wall Street’s expectations of EPS in the range of $2.20 to $2.30.
(UAL) stock gained 9.3% after the company reported a loss of $4.24 a share, worse than the expected $4.22 loss, on sales of $7.57 billion, below expectations for $7.68 billion. The company, though, forecasted a profit for the full year.
Alaska Air Group
(ALK) stock rose 0.2% after the company reported a loss of $1.31 a share, better than the expected loss of $1.51, on sales of $1.68 billion, above expectations for $1.66 billion.
(AAL) stock added 3.8% after the company reported a loss of $2.32 a share, better than the expected $2.40 loss, on sales of $8.9 billion, above expectations for $8.83 billion.
(T) stock gained 4% after the company reported a profit of 77 cents a share, beating estimates of 61 cents a share, on sales of $38.1 billion, below expectations for $38.3 billion.