Stocks Plunge on Corporate Profit Concerns

What you need to know…

The S&P 500 Index ($SPX) (SPY) on Wednesday closed down -4.04%, the Dow Jones Industrials Index ($DOWI) (DIA) closed down -3.57%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed down -5.06%.

U.S. stock indexes Wednesday plunged and settled sharply lower.  The prospects of lower corporate earnings due to rising prices and slower economic growth from Fed tightening undercut stock prices Wednesday. A -25% plunge in Target Wednesday led retailer stocks lower after it trimmed its yearly profit forecast due to a surge in costs.

High-valuation technology stocks also sank Wednesday on the outlook for the Fed to keep raising interest rates.  In addition, stocks fell on concerns that China will maintain lockdowns that undercut global growth prospects after it reported its first increase in Covid infections in the last five days.

Stocks Wednesday also had carry-over pressure from Tuesday’s comments from Fed Chair Powell, who said the Fed “won’t hesitate” to tighten policy beyond neutral to curb inflation and that it will continue to raise interest rates until there is “clear and convincing” evidence that inflation is in retreat. 

U.S. Apr housing starts fell -0.2% m/m to 1.724 million, weaker than expectations of 1.756 million.  Apr building permits, a proxy for future construction, fell -3.2% m/m to a 5-month low of 1.819 million, still above expectations of 1.814 million.

Comments Wednesday from Chicago Fed President Evans weighed on stocks when he said he sees a half-point interest rate increase when the FOMC meets next month and "probably thereafter."  He also said that he expects the economy to cool as Fed policy gets restrictive.

Cantor Fitzgerald said Wednesday that its call two weeks ago for a short-term bounce in U.S. stocks was “wrong” and “it no longer makes sense to own equities.” Cantor said “very concerning” earnings results from retailing giants show consumers are cutting back on discretionary purchases at the same time that margins are under pressure from higher costs. 

Today’s stock movers…

Retailer stocks Wednesday were hammered today and dragged the overall market lower. Target (TGT) closed down more than -25% Wednesday to lead losers in the S&P 500 after reporting Q1 adjusted EPS of $2.19, well below the consensus of $3.06, and cutting its full-year operating margin rate to about 6% from a prior estimate of 8% or higher.

Other retailers also slumped Wednesday, with Dollar Tree (DLTR) closing down more than -14% to lead losers in the Nasdaq 100.  Also, Costco Wholesale (COST) closed down by more than -12%, and Dollar General (DG) closed down by more than -11%.  In addition, Best Buy (BBY), Newell Brands (NWL), and Ulta Beauty (ULTA) closed down by more than -10%.  Finally, Walgreens Boots Alliance (WBA) closed down more than -8% to lead losers in the Dow Jones Industrials, and Walmart (WMT) closed down more than -6%.   

High-valuation technology stocks tumbled Wednesday and weighed on the overall market. Okta (OKTA) and Zscaler (ZS) closed down by more than -9%.  Also, Amazon.com (AMZN), Tesla (TSLA), Netflix (NFLX), Palo Alto Networks (PANW), Dexcom (DXCM), and Datadog (DDOG) closed down by more than -7%. 

TJX Cos (TJX) erased a loss of more than -6% Wednesday and closed up more than +6% to lead gainers in the S&P 500 after Telsey Advisory group said that while TJX’s Q1 sales came in lighter than expected, it had a stronger margin performance versus mega-caps Target and Walmart. 

Across the markets…

June 10-year T-notes (ZNM22) on Wednesday closed up by +18.5 ticks, and the 10-year T-note yield fell -9.6 bp to 2.890%.  Jun 10-year T-note futures rebounded from a 1-week low Wednesday, and the 10-year T-note yield fell back from a 1-week high of 3.010% as a slump in stocks boosted the safe-haven demand for T-notes.  Also, Wednesday’s weak U.S. housing data gave T-notes a boost after April housing starts fell more than expected and April building permits dropped to a 5-month low.