The Fed lifted rates by an expected 75 basis points on Wednesday and signaled a longer trajectory for policy rates than markets had priced in, fuelling fears of further volatility in stock and bond trading in a year that has already seen bear markets in both asset classes.
The U.S. central bank’s projections for economic growth released on Wednesday were also eye-catching, with growth of just 0.2% this year, rising to 1.2% for 2023.
Jitters were already present in the market after a number of companies – most recently FedEx Corp and Ford Motor Co – issued dire outlooks for earnings.
As of Friday, the S&P 500’s estimated earnings growth for the third quarter is at 5%, according to Refinitiv data. Excluding the energy sector, the growth rate is at -1.7%.
The S&P 500’s forward price-to-earnings ratio, a common metric for valuing stocks, is at 16.8 times earnings – far below the nearly 22 times forward P/E that stocks commanded at the start of the year.
Nine of the 11 major S&P sectors fell, led by declines of 2.2% and 1.7%, respectively, in consumer discretionary and financial stocks.
Shares of megacap technology and growth companies such as Amazon.com Inc, Tesla Inc and Nvidia Corp fell between 1% and 5.3% as benchmark U.S. Treasury yields hit an 11-year high.
Rising yields weigh particularly on valuations of companies in the technology sector, which have high expected future earnings and form a significant part of the market-cap weighted indexes such as the S&P 500.
The S&P 500 tech sector has slumped 28% so far this year, compared with a 21.2% decline in the benchmark index.
“If we continue to have sticky inflation, and if (Fed Chair Jerome) Powell sticks to his guns as he indicates, I think we enter recession and we see significant drawdown on earnings expectations,” said Mike Mullaney, director of global markets at
“If this happens, I have high conviction under those conditions that we break 3,636,” he added, referring to the S&P 500’s mid-June low, its weakest point of the year.
The Dow Jones Industrial Average fell 107.1 points, or 0.35%, to 30,076.68, the S&P 500 lost 31.94 points, or 0.84%, to 3,757.99 and the Nasdaq Composite dropped 153.39 points, or 1.37%, to 11,066.81.
Major U.S. airlines – which have enjoyed a rebound amid increased travel as pandemic restrictions end – were also down, with United Airlines and American Airlines falling 4.6% and 3.9% respectively. This took losses in the last three days to 11% for United and 10.6% for American.
JetBlue Airways Corp, off 7.1% and also recording a third straight loss, closed at its lowest level since March 2020.
Darden Restaurants Inc slid 4.4% after the Olive Garden parent reported downbeat first-quarter sales.
Volume on U.S. exchanges was 11.39 billion shares, compared with the 10.91 billion average for the full session over the last 20 trading days.
The S&P 500 posted one new 52-week high and 123 new lows; the Nasdaq Composite recorded 18 new highs and 699 new lows.