Stocks tumbled on Tuesday as traders' fears around contagion in the regional banking sector returned ahead of the Federal Reserve's rate decision.
The Dow Jones Industrial Average fell 367.17 points, or 1.08%, to end at 33,684.53. The S&P 500 slid 1.16% and closed at 4,119.58. The Nasdaq Composite dropped 1.08%, ending the session at 12,080.51. The three major averages fell for a second consecutive session.
Bank shares slid, with the SPDR S&P Regional Banking ETF dropping more than 6%. Traders questioned the stability of smaller regional financial institutions after the crisis that engulfed Wall Street in March and brought about the end of Silicon Valley Bank and First Republic Bank. Regional banks PacWest and Western Alliance declined 27% and 15%, respectively.
Meanwhile, JPMorgan Chase's shares shed 1.6%, giving back some of its gains from the previous session. A day earlier, JPMorgan shares rose after the takeover of embattled regional First Republic Bank. Other large banks including Goldman Sachs and Citigroup also dropped more than 2%. Bank of America fell 3%.
"We think that the concerns around the bank sector, combined with uneasiness regarding the debt ceiling — and most importantly, apprehension over the uncertain future Fed rate policy stance — are all contributing to this risk-off sentiment. So in an area like the bank sector that already was under stress, we're also seeing greater unease because of these other contributing factors," said Greg Bassuk, CEO of AXS Investments.
The Fed's two-day policy meeting, which kicked off Tuesday, is expected to conclude with the central bank announcing another quarter-point rate hike on Wednesday. Per the CME Group's FedWatch tool, traders are pricing in a roughly 85% chance of a rate hike. Investors will be looking for clues on whether the Fed will keep rates steady after this meeting, or if it will further tighten monetary policy to fight inflation.
Weighing on sentiment Tuesday was word from the U.S. Treasury that the country may hit the debt ceiling sooner than expected. Treasury Secretary Janet Yellen warned on Monday that the U.S. may run out of measures to pay its debts as early as June 1, earlier than the late July deadline Goldman was estimating.
"You have the perfect cocktail for a risk-off day," said Art Hogan, chief market strategist at B. Riley Wealth Management. "It's a typical risk-off day with three binary situations staring at us from the short-term horizon."
U.S. stocks closed lower Tuesday.
The Dow Jones Industrial Average dropped 367 points, or 1.08%. The S&P 500 and the Nasdaq Composite also ended Tuesday's trading session on losses, declining 1.16% and 0.89%, respectively.
— Hakyung Kim
An interest rate hike by the Federal Reserve tomorrow won't come as much of a surprise to markets — but what investors will be paying attention to is the likelihood of more rate increases later this year, says The Wealth Alliance's CEO and managing director Rob Conzo.
"I don't think the interest rate hike is any great news and won't really affect anything. What everyone's listening to here is Powell's speech about how long [we'll have] these rate hikes? Or how long he's going to keep an elevated interest rate environment, or when he may see interest rate pullbacks," Conzo said.
However, Conzo believes the Fed Chairman will offer little clue for the markets as to the central bank's intentions for its monetary policy tightening path.
"I believe Powell is not going to speak to that. He's going to do what Powell has been doing," Conzo added. "His words that he used in past minutes were, 'we're going to keep at it.' That happened to be the name of Paul Volcker's autobiography: 'Keeping At It.' Jerome Powell is literally taking a page out of Paul Volcker's playbook."
— Hakyung Kim
WTI Crude settled down 5.29% at $71.66, marking its lowest settle since Mar. 24, when it settled at $69.26. WTI Crude has declined 10.7% in 2023.
Brent crude and natural gas also settled lower, falling 5.03% and 4.49%, respectively. Brent crude has shed 12.33% year to date, closing at $75.32 on Tuesday. Meanwhile, natural gas has tumbled more than 50% in 2023.
— Hakyung Kim
Barclays lowered its rating on a host of retails stocks, citing a pullback on spending among consumers across all income levels.
"Our bottom-up approach to analyze promotions across the retail landscape, regardless of category and target income bracket, suggests that retailers are struggling to drive traffic, conversion, and sales, despite markedly cleaner inventory levels," the firm said in a Tuesday note.
Among the retail names downgraded, Figs and winter apparel maker Canada Goose saw the largest downturns on Tuesday, declining 6% and 4.7%, respectively.
CNBC Pro subscribers can read more about the downgrades here.
— Hakyung Kim
Goldman Sachs says investors haven't fully moved past March's bank crisis as banking stocks trade lower on Tuesday. The firm's analysts noted that following the failures of Silicon Valley Bank and Signature Bank in March, the market's worries were quickly alleviated by a deposit injection at First Republic Bank.
"Since bottoming out at 3808 on Mar. 13, the S&P 5000 gained almost 10% [as of] Monday night on the back of relaxed banks tensions, as well as a strong earnings season (so far) and a growing consensus that the Fed will soon pause its year-long rate hiking cycle," several Goldman analysts wrote in a Tuesday note.
"But today, we appear to be seeing some return of the March concerns following JPM's announced acquisition of FRC Monday. Regional bank stocks are down 4% to 13%. [Managing director Richard] Ramsden sees the JPM acquisition as accretive and points out that the transaction highlights that G-SIBs will be allowed to bid on FDIC transactions even if they are above the deposit cap," the note continued.
— Hakyung Kim
As recession fears keep flaring up again on Wall Street, investors can find safety in cheap, dependable, defensive stocks, according to UBS.
Given recent softness in economic data, the bank says cyclical stocks that benefit from high inflation have further downside ahead. Instead, the UBS playbook advises investors to stick to defensive stocks that remain cheap, such as in the telecom and healthcare industry groups.
"In prior bear markets around recessions, cyclicals have underperformed defensives by 22% from peak to trough," UBS' associate strategist Sean Simonds said in a note last week.
CNBC Pro subscribers can read on for stock picks here.
— Sarah Min
Chegg shares lost almost half their value Tuesday, Tuesday's selloff in Chegg shares exposing concerns of how the latest technology craze may be putting some companies' revenue sources in danger.
The latest tumult for the education technology stock kicked off Monday evening after management highlighted how ChatGPT is hindering its growth.
While Chegg may be the first shoe to drop, it's certainly not the last company set to showcase some of the risks posed by AI.
CNBC Pro subscribers can read more about sectors at risk from AI here.
— Hakyung Kim, Samantha Subin
Savita Subramanian, head of U.S. equity and quantitative strategy at Bank of America Securities, said that "mentions of weak demand soared to record levels" so far this earnings season.
Subramanian noted that mentions of tepid demand this round of earnings announcements is even higher than during the Covid-19 pandemic and Great Financial Crisis.
To be sure, the strategist said that corporate optimism "remains above average" and corporate sentiment remains "surprisingly strong." She added that despite concerns around tightening credit conditions, the bank's Corporate Sentiment score based on Natural Language Processing (NLP) analysis remains flat year over year, well off its 2Q22 lows. The score's year-over-year performance improved for the first time since the final quarter of 2021, "point[ing] to a potential earnings recovery."
— Hakyung Kim, Robert Hum
Looking beyond the next few months, the Federal Reserve can afford to pursue a more patient strategy, according to the Washington Center for Equitable Growth's director of Macroeconomic Policy, Michael Madowitz.
"Looking beyond the next few months, the Fed is in a much safer position than it was a year ago—the economy is growing, and Fed funds rates are near the 5% benchmark, which gives the Fed enough room to cut when the next U.S. recession comes along. Arguably, the main reason we got high inflation coming out of this recession was the Fed could not risk hiking rates too early because it didn't have the breathing room it does now," Madowitz said in a Tuesday note.
He added that market-based breakeven inflation rates "suggest there is little threat to the Fed's credibility," giving the central bank room to relax its aggressive tightening policy path it began in March 2022.
— Hakyung Kim
These are some of the stocks making the biggest midday moves:
— Alex Harring
Energy and financial stocks are Tuesday's biggest underperformers, as all sectors of the S&P 500 turn red.
The broad market index has declined 1.7% as of Tuesday afternoon. The Energy Select Sector SPDR Fund (XLE) is down almost 5%, followed by the Financial Select Sector SPDR Fund (XLF) dropping 2.7%.
Meanwhile, consumer discretionary stocks and health care companies are seeing the smallest losses. The Consumer Discretionary Select Sector SPDR Fund (XLY) and Health Care Select Sector SPDR Fund (SLV) are down just 0.9% and 1%, respectively.
— Hakyung Kim
European stock markets fell on Tuesday, with the benchmark Stoxx 600 index provisionally closing 1.3% lower.
All sectors declined as investors weighed a fall in oil prices and assessed the path of European Central Bank interest hikes with inflation remaining well above target. The Federal Reserve's monetary policy meeting and declines in U.S. bank stocks also weighed.
France's CAC 40 index dropped 0.45%, Germany's DAX fell 1.23% and the U.K.'s FTSE 100 was 1.24% lower.
— Jenni Reid
The private market is in a very fundamentally driven environment right now, according to Orlando Bravo, co-founder and managing partner of software buyout firm Thoma Bravo.
"Everyone is now talking about profitable growth," he said in an interview with David Faber on the sidelines of the Milken Institute Global Conference in Beverly Hills, California.
"The valuations for unprofitable companies have absolutely crashed and I don't see them coming back anytime soon," he added. "Investors have lost too much money in unprofitable growth."
The small part of the software index that is profitable is trading at fair levels, with a roughly 30 or 40 forward price-to-earnings multiple. That is "a pretty decent environment for these companies," Bravo said.
— Michelle Fox
Oil prices fell sharply Tuesday following an unexpected contraction in Chinese factory activity, reported Sunday, and ahead of further interest rate hikes expected from the Federal Reserve and European Central Bank this week.
Brent crude futures dropped 4.3% to $75.87 at 10:53 a.m. ET, while West Texas Intermediate crude futures were down 4.4% to $72.34 — their lowest levels since late March.
The drops came despite news that OPEC oil output fell in April, according to a Reuters survey.
— Jenni Reid
Educational tech stock Chegg cratered 48% on Tuesday – and its peers have joined it in sympathy.
Chegg, on pace for its worst day since November 2021, slid following its Monday evening earnings call. There, CEO Dan Rosensweig noted that ChatGPT is "having an impact on our new customer growth rate." Chegg shares subsequently tumbled in after-hours trading Monday night, and the hemorrhaging continued into Tuesday. The stock has hit its lowest level since April 2017.
Educational names came under pressure as well: 2U shed more than 14%. Duolingo dropped more than 10%, and John Wiley & Sons dropped 7%.
-Darla Mercado, Chris Hayes
The VanEck Oil Services ETF was lower by 4.5% on Tuesday, and headed for its worst day since mid-March. On March 15, the index declined 7.32% following BP's earnings and uncertainty around the price of oil.
Shares of NexTier Oilfield Solutions weighed on the ETF, last down 7%. Liberty Energy and Halliburton slid more than 6%, each. Expro Group Holdings declined 5.8%.
U.S. West Texas Intermediate crude hit a low of 73.04, or its lowest level since Mar 30 when it traded as low as 72.61.
— Sarah Min, Gina Francolla
Eric Rosengren thinks his former colleagues at the Federal Reserve will be making a mistake if they raise interest rates again Wednesday.
The former Boston Fed president, who retired from the board in September 2021, told CNBC on Tuesday that turmoil in the banking industry and an economic slowdown should push policymakers to end the rate-hiking campaign that began in March 2022.
"My own view is that the economy is quite likely to slow down in the second half of the year and that it's not necessary at this point to be raising rates until we get a better view of what the second half of the year looks like," Rosengren said on "Squawk Box."
Traders in the futures market are pricing in a 96% chance that the Federal Open Market Committee approves a quarter percentage point rate hike when the two-day meeting ends, according to the CME Group's FedWatch tracker.
—Jeff Cox
Shares of regional banks were under pressure again on Tuesday, extending losses from the prior trading session.
The SPDR S&P Regional Bank ETF (KRE) slid another 3.5% after losing 2.8% on Monday. Meanwhile, PacWest Bancorp dropped 16% and was halted for volatility. That stock fell more than 10% on Monday.
— Jesse Pound
Employment openings hit a nearly two-year low in March, a sign the jobs market is loosening up, the Labor Department reported Tuesday.
Openings totaled 9.59 million, the lowest since April 2021 and below the FactSet estimate of 9.64 million, according to the Job Openings and Labor Turnover Survey.
The Federal Reserve watches the JOLTS report closely for signs of labor slack. Declining job openings is a positive for inflation as it helps put less pressure on wage increases.
The full story can be found here.
—Jeff Cox
Notable short seller Hindenburg Research took a short position against Carl Icahn's conglomerate Icahn Enterprises, alleging "inflated" asset valuations, among other reasons.
"Overall, we think Icahn, a legend of Wall Street, has made a classic mistake of taking on too much leverage in the face of sustained losses: a combination that rarely ends well," Hindenburg Research said in a note released Tuesday.
The shares fell 9% in premarket trading.
— Yun Li