Stocks sold off sharply Tuesday after comments from Federal Reserve Chair Jerome Powell suggested that rates may need to go higher for longer, fueling fears of a potentially larger hike at the central bank's next policy meeting.
The Dow Jones Industrial Average shed 574.98 points, or 1.72%, to end at 32,856.46. The S&P 500 lost 1.53% to close at 3,986.37 and below the 4,000 level. The Nasdaq Composite dropped 1.25% to settle at 11,530.33.
As the major stock indexes fell, the 2-year Treasury yield jumped to its highest level since 2007 at 5%. Tuesday's selloff brings the Dow into negative territory for 2023, down about 0.9%. The S&P and Nasdaq are up about 3.8% and 10.2%, respectively, for the year.
"The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated," Powell said in remarks to the Senate Banking, Housing and Urban Affairs Committee Tuesday morning. "If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes."
The comments indicated that the Fed may consider a larger rate hike than last month's 25 basis point increase at its next policy meeting on March 21-22.
They also signaled a potential return to a half-point rate hike at the central bank's March meeting, depending on the strength of incoming economic data, according to Morgan Stanley.
Powell's remarks could also mean that the peak rate for federal funds, also called the terminal rate, will likely go higher than previously expected, despite investor hopes that the Fed might stop hiking soon.
"This isn't surprising news, but it's a tough reminder for markets after such a brisk rally," said eToro U.S. investment analyst Callie Cox. "The Fed's top priority is getting inflation down, and for good reason. People are starting to factor in persistently higher inflation, which could be the worst-case scenario for long-term investors and run the risk of prices spiraling higher."
Bank shares led the losses as investors feared more rate hikes will tip the economy into a recession. Wells Fargo lost 4.7%. Bank of America, Goldman Sachs and JPMorgan Chase lost about 3% each. Mega-cap tech stocks also tumbled, with Apple, Alphabet and Microsoft falling at least 1% each.
Airline stocks bucked the broader market downtrend after the Justice Department sued to block JetBlue's Spirit Airlines acquisition. United Airlines rose 3%. Delta and American gained 1.6% and 1.5%, respectively.
Powell's comments raise the stakes for February's jobs report out Friday morning, which could show a resilient labor market that allows the Fed to keep hiking. Economists expect 225,000 jobs were added last month, according to a Dow Jones survey.
Stocks finished lower Tuesday after Federal Reserve Chair Jerome Powell hinted at higher rates.
The Dow Jones Industrial Average shed 574.98 points, or 1.72%, to end at 32,856.46, while the S&P 500 lost 1.53% to close at 3,986.37 and below the 4,000 level. The Nasdaq Composite dropped 1.25% to settle at 11,530.33
— Samantha Subin
Six new 52-week lows in the S&P 500 on Tuesday included one office REIT that dropped to its weakest point in 13 years.
— Scott Schnipper, Christopher Hayes
Jefferies is bullish on Oracle shares, saying that investors can "expect more tailwinds than headwinds" on the software company.
"With two upcoming quarters of easier comps, short-term on-premise tailwinds from a softer public cloud demand backdrop, and a positive read through to back office app demand from WDAY, we believe growth expectations are reasonable," analyst Brent Thill wrote in a Tuesday note.
"We think that management announcing FY26 targets on the top and bottom lines at its analyst day signal increased confidence and visibility into the growth drivers of the business," Thill added.
Jefferies set its price target to $105, implying 18% upside from Monday's closing price. Oracle shares have gained about 8% in 2023.
— Hakyung Kim
F/m Investments is launching the fifth fund in its US Benchmark series, which tracks specific parts of the Treasury curve.
The newest fund, the US Treasury 6 Month Bill ETF, will trade under the ticker XBIL. It is slated to begin trading on Tuesday.
Some of the short end funds in the series, which began last year, have found traction with investors. The three-month (TBIL) and 2-year (UTWO) Treasury funds each have more than $300 million in assets.
The funds are designed to hold the most current "on the run" Treasuries of the stated maturity. They are not derivative based products like single-stock ETFs.
"With this launch of XBIL, we're responding to investor demand for simplified access to the highest yielding US Treasury security today, with 6-month Treasuries yielding over 5%," said Alexander Morris, F/m's President and CIO, said in a press release.
— Jesse Pound
The percentage of Apple's iPhones sold in China has grown about 10% year-to-date, Barclays estimates – although growth decelerated to low single digits in the last three weeks.
The firm attributes the strength to better supply, pent up demand post Covid and price promotions, but said it doubts it's sustainable.
Meanwhile, February App Store growth surprised to the downside by posting 1% decline.
"Overall, we believe China reopening should benefit travel and entertainment first, not electronics/goods, which has been the sentiment we picked up from our on the ground checks. Higher inflation along with China reopening could also dampen consumer demand for electronics."
Barclays has an equal weight rating on Apple and a $145 price target.
— Tanaya Macheel
The key advantage Bank of America has is its technology, which helps it serve more customers at lower cost than rivals, Wells Fargo analyst Mike Mayo wrote recently.
The continuing benefits from its technology implementation will give Bank of America the "best 2023 spread of revenue vs. expense growth" and higher profit margins, Mayo wrote in a March 6 note.
CEO Brian Moynihan has preached the benefits of his "responsible growth" mantra, which has leaned heavily on technology to serve customers as he trims costs. The second biggest U.S. bank by assets after JPMorgan Chase already has the most efficient consumer banking division, with its efficiency ratio improving from 57% in 2021 to an estimated 46% by 2025.
"BAC can now serve more customers, provide more services, engage more often, and do so at lower cost," Mayo said.
In January, Mayo wrote that Bank of America shares could climb 55% this year on rising margins and earnings.
— Hugh Son
The free cash flow picture for Virgin Galactic is getting worse, according to Wells Fargo.
Analyst Matthew Akers, who has an underweight rating on the stock, said in a note to clients Tuesday that he expects the company to burn through more than $600 million in cash in 2023 and 2024.
"While SPCE still aims for a Q2 2023 commercial launch, its cash burn should continue to grow, peaking in 2024, and likely worse than consensus outlook for 2024 cash improving YOY," the note said.
Wells Fargo trimmed its price target on Virgin Galactic to just $2.50 per share, down from $3 previously.
— Jesse Pound
Netflix's plan to crack down on password sharing should result in a net benefit for the company, Loop Capital said Tuesday.
In a note to clients, managing director Alan Gould said a survey of more than 500 Netflix users in the U.S. showed the change will increase revenue by 3%. That's smaller than the per-user revenue gain of 27%, offset partially by the fact that paying subscriptions would decrease by 19%.
Netflix said in early February it would start charging in Canada, New Zealand, Spain and Portugal. The streaming giant is expected to have data from those countries prior to instituting the policy in the U.S., which is its largest market at 40% of global revenue, Gould said.
Gould said he expects Netflix will implement the password sharing clampdown in the U.S. some time in the middle of 2023. That while initially create higher churn of subscribers and lower engagement, but those should move closer to historical levels by the second half of the year.
While having a hold rating on the stock, Gould said he now expects 2023 and 2024 earnings per share to come in 6% to 7% higher than he previously estimated. Gould also raised his price target by $10 as a result of the data to $330, which implies the stock could gain 5.8% from where it closed Monday over the next year.
Netflix is up 4.8% so far this year, a modest gain after losing 51.1% in 2022.
— Alex Harring
Stocks hovered near session lows as the final hour of trading kicked off.
The Dow Jones Industrial Average shed about 570 points, or about 1.7%, while the S&P 500 lost 1.6%. The Nasdaq Composite dropped 1.3%.
— Samantha Subin
Markets hit selloff mode Tuesday after comments from Federal Reserve Chair Jerome Powell indicated higher rates for longer.
But the market reaction, and repricing of inflation expectations may actually be a good thing for investors hoping for a softer landing, said Wells Fargo equity strategist Anna Han.
"What's also coinciding is the market is pricing in a higher chance of a softer landing," she said. "Again, it's strange to have both. It can feel uncomfortable, but that's constructive."
Stickier inflation may dash investors hopes near term for a Fed pivot, but it could actually payoff in the long-run, she added.
"Were inflation to come crashing down, the Fed was at risk of overdoing it, or tightening too much and tightening us into that recession," Han said. "That was a concern that there would be this misalignment with timing."
While inflation is easing slower than expected, the pace still reflects a healthy economy being impacted by the Fed, she added.
"If they can continue to nibble away at inflation, I think you raise the possibility and the chances of achieving that soft landing that we so desperately want," Han said.
— Samantha Subin
Large cap active fund managers in February had their worst month since July 2022, according to Bank of America.
Equity strategist Savita Subramanian said in a note to clients that average fund in that category underperformed the Russell 1000 benchmarks by 41 basis points in February.
"The outperformers of 2022 largely outperformed in February after lagging in January: Value funds outperformed, while Growth funds lagged," Subramanian said.
Just 15% of growth managers beat their category index, compared with 66% of value managers. Overall, just 34% of managers came out ahead.
— Jesse Pound
Peter Boockvar of Bleakley Financial Group still expects the Federal Reserve to raise rates by 25 basis points, not 50, despite Chair Jerome Powell's latest comments.
"After taking an Advil while watching the questions being asked of Powell and with Powell saying the dot plot in a few weeks will most likely tilt up in terms of the median end point of the fed funds rate from the previous 5.4%, the fed funds futures market is pricing in a 48% change of a 50 bps hike in two weeks," he wrote in a note. "I do not think the Fed goes 50 bps at any of the remaining rate hike meetings at this point after already slowing the pace and will continue on with 25 bps until it finally stops."
— Fred Imbert
Deteriorating market breadth, even as the S&P 500 and Nasdaq Composite remain firmly in positive territory this year, is a troubling signal for investors, BTIG's Jonathan Krinsky said Monday.
On Monday, the Dow Jones Industrial Average and the S&P 500 closed higher after Goldman Sachs initiated coverage of Apple with a buy rating, despite pressure from rising bond yields. The iPhone maker, which makes up about 7% of the S&P, helped lift the broader index.
"The SPX traded up to 4078 so far [Monday], which was the upper end of our initial resistance zone," Krinsky wrote. "Given the events the rest of the week, the fact that yields remain firm, and this breadth divergence, our sense is even near-term risk/reward is now skewed to the downside here."
— Sarah Min
Airlines are notable outperformers Tuesday after the Justice Department sought to block JetBlue's proposed $3.8 billion acquisition of Spirit Airlines on antitrust grounds.
The idea behind the rally is that legacy carriers will face less intense competition from a strengthened rival if Jet Blue and Spirit are not allowed to combine.
United Air (UAL) was rallying 4% in midday trading Tuesday, followed by Delta (DAL) at 2.3%, Alaska (ALK) up 2.1%, American (AAL) ahead 2% and Southwest (LUV) higher by 0.5%. (Separately, Evercore ISI upgraded Delta to overweight from in-line earlier in the day.)
The 20-stock Dow Transportation Average is up 12.2% year to date, more than twice the 5.8% gain in the S&P 500, despite the recent downtown in the rails (Norfolk Southern is off 2.8% Tuesday while CSX is lower by 2%).
The S&P Airlines Index, meanwhile, is higher by 2.1% Tuesday and up 19.3% year to date. The airlines as a group are 34.2% above their 52-week low, according to FactSet data.
— Scott Schnipper
Last week's low of 3928 in the S&P 500 index and February's high of 4195 "remain big tactical levels," said Strategas Research Partners' head of technical analysis Chris Verrone in a Tuesday note to clients.
That range "likely holds some significance in the weeks and months ahead. 4195 is the big level on the high-side. In between, it remains a very bifurcated trading market," Strategas said. Meanwhile, "last week's low likely holds some increased significance," too.
Within the market, "Keep tabs on Homebuilders, after big rallies the group is starting to falter. Industrials largely remain leadership across the board – we feature PCAR today. Meanwhile, the weakness in Towers/Data Centers persists and TSLA is again rolling over under its 200-day average," according to the note.
Strategas continues to highlight continued strength in industrial stocks regardless of their market capitalization, noting recent relative outperformance among Russell 2000 industrials, for instance, saying "small-cap industrials [are] stretched," but are still showing "clear leadership."
— Scott Schnipper
Industrial stocks dominated new, 52-week highs in the S&P 500 on Tuesday, accounting for eight of the nine:
Outside the S&P 500, other 52-week highs Tuesday included:
New S&P 500 52-week lows were:
Other 52-week lows outside the S&P 500 included:
— Scott Schnipper, Christopher Hayes
Regional bank stocks are under pressure again on Tuesday, with the SPDR S&P Regional Bank ETF (KRE) on track for its sixth losing day in seven.
The fund is down about 2.8% for the session, extending its losses after Jerome Powell's Congressional testimony was released.
Shares of Zions Bancorp and Fifth-Third were each down about 4%.
— Jesse Pound, Gina Francolla
All the market wants to do is go up, but don't be surprised if Federal Reserve Chair Jerome Powell does everything in his power to prevent that from happening, said Mariner Wealth Advisors' Tim Lesko.
"Equity markets seem to want to go up and he wants to keep a lid on things in a metered way," he said.
Lesko added that Powell's commentary before the Senate also served as a reminder to investors that inflation isn't done.
"The words today were really troubling for the equity market," he said. "They basically tell people that he's going to continue to talk rates up so that the market doesn't do what it wants to do."
— Samantha Subin
The dollar index has hit highs not seen since January.
The index, which measures the dollar against a basket of currencies, hit a high of 105.43 during Tuesday's session. That's the highest the index has reached since Jan. 6, when it notched 105.631.
— Alex Harring, Gina Francolla
The gap between the 2-year Treasury yield and the 10-year Treasury rate widened to 100 basis points during Tuesday's trading. This spread has not settled at levels this wide since September 22, 1981.
The 2-year yield jumped to its highest since 2007 after Federal Reserve Chairman Jerome Powell said the central bank may need to increase the pace of interest rate hikes again.
The yield curve inversion is a phenomenon that for half a century has accurately signaled coming recessions.
— Yun Li