A rout in Big Tech weighed heavily on stocks, with gains in the broader market sputtering as a report showed Americans grew more downbeat about prospects for the economy.
Traders got another reality check Tuesday after a worrisome reading on consumer confidence.
A gauge of expectations – which reflects a six-month outlook – tumbled to an almost decade low.
The figures come at a time when analysts remain bullish about corporate earnings, with net-margin estimates for S&P 500 companies at a record high.
The bleak economic picture pushed the U.S. equity benchmark lower, following gains that topped 1% earlier in the day.
The index hovered near the key Fibonacci 38.2% retracement level of 3,815. Quarterly rebalancing of portfolios also fueled volatility.
The Nasdaq 100 sank over 3%, dragged down by giants like Amazon.com and Tesla. Treasuries and the dollar rose.
For Goldman Sachs strategists, margin forecasts are too optimistic, putting stocks at risk of more losses when Wall Street analysts downgrade their estimates.
Meantime, HSBC’s Max Kettner said equities aren’t still reflecting the impact of a potential recession, with earnings expectations at risk of being revised lower.
“The one thing that we can say with conviction is that high market volatility is likely to persist until there’s clear evidence that inflation is declining and the Fed pivots towards a less hawkish stance, taking the off-ramp away from the recession destination,” said Jason Draho, head of asset allocation for the Americas at UBS Global Wealth Management.
Federal Reserve officials played down the risk that the U.S. economy will tip into a recession, even as they raise rates, with another 75 basis-point hike on the table next month.
New York Fed President John Williams and San Francisco’s Mary Daly both acknowledged they had to cool inflation but insisted that a soft landing was still possible.
A key set of rates that the Fed is focusing on to help judge financial conditions is still some way from levels that might prompt officials to halt their tightening plans.
Inflation-adjusted U.S. rates at the shorter end of the curve are still mired below zero even as real rates on longer-tenor securities this month surged to levels unseen since 2019.
It’s tough to see a high probability of any sustained stock rally in the near term, according to Alifia Doriwala, managing director at RockCreek.
She says the market could be in for an even worse third quarter. The S&P 500 has tumbled more than 15% since the end of March.
“We could see a lot of turbulence during earnings season if companies start revising earnings downward because they are seeing increased margin pressures,” Doriwala told Bloomberg Television.
Elsewhere, oil rose for a third day as global output threats compound already red-hot markets for physical supplies, while the Group of Seven agreed to look into a price cap for Russian crude.
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