NASDAQ 100, Dow Jones, S&P 500: Rising Rates, Mixed Earnings Stir Market Turbulence

Highlights

• Major indices drop amid rising interest rates.
• Fitch downgrades U.S. credit rating, shocks market.
• Q2 productivity surge offers economic hope.

Overview

Wall Street witnessed a downward spiral on Thursday as the market grappled with rising interest rates and a flood of recent earnings results. This bearish trend followed Wednesday’s selloff, giving investors insight into the financial health of major corporations and the market’s overall pulse.

The Dow Jones Industrial Average, Nasdaq Composite, and S&P 500 each closed in the red, falling 0.3%, 0.2%, and 0.4% respectively. Contributing to this market pressure, the benchmark 10-year Treasury yield rose to its highest since November 2022 at 4.1%. This increase had a pronounced impact on the real estate sector, which dropped more than 1%.

Earnings Results Sway Market Movements

Current corporate earnings news played a significant role in shaping the day’s market movements. Chip manufacturer Qualcomm posted a disappointing 10% fall after its Q3 revenue expectations missed the mark. In tandem, Paypal‘s stock declined by the same margin despite achieving in-line results. On the other hand, Moderna reported a 1.5% increase driven by an improved Covid vaccine outlook. Investors anxiously anticipate earnings reports from tech giants Apple and Amazon, due to be released after the close.

Fitch Downgrade Triggers Market Selloff

Moreover, the current stock selloff can be traced back to Fitch Ratings’ recent decision to downgrade the U.S. long-term foreign currency issuer default rating from AAA to AA+, citing an “expected fiscal deterioration” over the next three years. This action sent shockwaves through the market, resulting in the Nasdaq Composite’s worst day since February.

Q2 Productivity Surges Amid Economic Hope

However, a glimmer of economic hope lies in the weekly jobless claims and Q2 productivity data, both of which came in as expected, pointing towards an uptick. Meanwhile, the Bank of England has decided to hike interest rates by 25 basis points to combat inflation.

In an optimistic shift for the US economy, the Labor Department reported Thursday that nonfarm productivity saw a substantial 3.7% surge in the second quarter. This increase, a result of a 2.4% rise in output coupled with a 1.3% drop in hours worked, outstripped the Dow Jones-surveyed economists’ forecast of 2.3%.

Despite compensation costs rising 5.5%, unit labor costs, which benchmark hourly compensation against productivity, only increased by a modest 1.6%. This increase was tempered by the significant productivity hike and fell short of economists’ 2.5% estimate. In comparison, Q1 recorded a 1.2% decline in productivity, while unit labor costs escalated by 3.3%.

In the job market, weekly unemployment claims climbed slightly to 227,000, up by 6,000 from the previous week. However, this number aligns precisely with economists’ projections. This data sheds light on the labor market’s condition, as lower jobless claims suggest fewer layoffs and more active hiring.

Analyst:  Momentum ‘Quietly Eroding’

Despite this turbulent outlook, Chris Verrone of Strategas warns that the market’s momentum has been “quietly eroding” over recent weeks, suggesting a potential correction. Investors should brace for a potential “break, tepid rally, break again” pattern while keeping in mind that the longer-term trend is still upward.

Short-term Forecast

In the short term, the stock market is expected to face turbulence due to rising interest rates and mixed corporate earnings. With increasing Treasury yields pressuring sectors like real estate and potential corrections, investors must stay alert.

However, a silver lining emerges from the encouraging Q2 productivity surge and stable jobless claims. Tech giants’ forthcoming earnings reports will also heavily influence the market’s course. In the face of uncertainty, investors should brace for possible volatility but remember that the longer-term trend still suggests growth. Vigilance and a focus on economic fundamentals will be key in navigating this dynamic market landscape.