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S&P 500 falls for 3rd straight day after Powell says no guarantee of soft landing for U.S. economy, JP Morgan warns of recession risk

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U.S. stock indexes end mixed Wednesday, as investors focused on remarks by central bankers and from corporate executives, while fretting that soaring inflation is damaging the world’s biggest economy.

How did stock indexes do?
  • The Dow Jones Industrial Average
    DJIA,
    +0.27%

     rose 82 points, or 0.3%, to end at 31,029.31.

  • The S&P 500
    SPX,
    -0.07%

     edged down 2.27 points, or 0.1%, to close at 3,818.83.

  • The Nasdaq Composite
    COMP,
    -0.03%

    shed 3.65 points, a fall of less than 0.1%, ending at 11,177.89.

On Tuesday, the Dow fell 491.27 points, or 1.6%. The S&P 500 fell 2% and the Nasdaq Composite dropped 3%. All three booked their worst daily percentage declines since June 16, according to Dow Jones Market Data.

What drove markets?

Earlier gains for U.S. stock benchmarks mostly faded Wednesday, as investors monitored corporate earnings and remarks from central bankers looking to battle high inflation by tightening financial conditions.

Investors were focused on a mixed bag of corporate earnings results trickling out ahead of the mid-July quarterly deluge for insights into whether bulging inventories of goods and sharp inflation pressures pinch profit margins.

“It remains to be seen, but it feels like the market is expecting profit margins to be squeezed, and profit to be revised lower,” said Jack Janasiewicz, portfolio manager at Natixis Investment Managers Solutions, by phone.

He pointed to the S&P 500 sinking about 25% below its January peak last week, before it staged a slight rebound, as a sign that investor might be “somewhat discounting that earnings are already being ratcheted down,” even before Wall Street analysts have yet to substantially lower their earnings estimates.

“Maybe the equity market has already done some of that,” Janasiewicz said.

Focus also was on Federal Reserve Chair Jerome Powell who said Wednesday at a European Central Bank forum on central banking that he sees a path back to 2% inflation while sustaining strong labor market, but warned there was “no guarantee that we can do that.”

European Central Bank President Christine Lagarde, Bank of England Gov. Andrew Bailey and Augustin Carstens, head of Bank for International Settlements, also spoke at the same conference.

On U.S. economic data, the first-quarter GDP was revised to show an 1.6% decline, compared with the prior 1.5% drop.

Economists at JP Morgan Chase and Co. said on Wednesday that they now see a U.S. economic recession this year as a reasonable risk to consider, given the GDP contraction and aggressive moves planned by the Fed to fight high inflation through higher rates. They also didn’t rule out a risk of a global economic slowdown.

Equities were limping toward the end of a miserable first half of the year. The S&P 500 is down 19.6% so far in 2022 — on track for the worst first-half performance since 1970 — hit by concerns that inflation rates at multidecade highs are badly damaging household sentiment and that the Federal Reserve’s response to surging prices may tip the economy into recession.

Read: What’s next for the stock market after the worst 1st half since 1970? Here’s the history.

“I think the biggest conundrum we have right now is we have not had an earnings recession, the analysts remain positive in this quarter,” Louis Navellier, chairman of Navellier & Associates, said in an interview. However, corporate profit margins are under pressure as inflation remains heated, he said.

“This is going to be a very interesting quarter where I’ve never seen a recession where their earnings are still accelerating,” Navellier said. 

See: Wall Street’s favorite stock sector has potential upside of 43% as we enter the second half of 2022

Wall Street’s dive on Tuesday led Asian and European bourses lower, particularly with worries that supply constraints in China could exacerbate global inflationary pressures. Such concerns were illustrated in Spain on Wednesday, where data showed prices rising by 10.2% in June, their fastest pace in 37 years.

Companies in focus
Other assets
  • The yield on the U.S. 10-year Treasury note BX:TMUBMUSD10Y declined by 11.5 basis points to 3.091%.

  • The ICE U.S. Dollar Index
    DXY,
    +0.01%

     edged up 0.6%.

  • Bitcoin
    BTCUSD,
    -0.73%

     fell 0.6% to trade near $20,020.

  • Oil prices fell, with WTI crude CL.1, down 1.8% to settle at $109.78 a barrel.

  • August gold futures
    GCQ22,
    +0.20%

    lost $3.70, or 0.2%, to settle at $1,817.50 an ounce.

  • Hong Kong’s Hang Seng
    HSI,
    +0.31%

    fell 1.9%; the Nikkei 225 in Japan slipped 0.9%; China’s Shanghai Composite
    SHCOMP,
    +0.75%

    shed 1.4% after President Xi Jinping reiterated that the regime’s strict COVID-19 policy was “correct and effective.”

-Additional reporting by Jamie Chisholm



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