By Ankika Biswas and Devik Jain
(Reuters) – Wall Street’s main indexes slid more than 2% on Friday as investors feared the U.S. Federal Reserve’s hawkish policy actions to quell inflation could trigger a recession and dent corporate earnings.
The Dow was briefly down more than 20% from its Jan. 4 record all-time closing peak of 36,799.64 points. A close of 20% or more below that level would confirm the blue-chip index was in a bear market, according to a widely used definition. The S&P 500 and the Nasdaq are already in a bear market.
The S&P 500 and the Nasdaq are also closing in on mid-June lows – their weakest points of the year – with the benchmark index now 0.7% away from that grim milestone. The Dow is trading at November 2020 lows.
After enjoying hefty gains for last two years, Wall Street has been rocked in 2022 amid worries about a host of issues including the Ukraine conflict, China COVID-19 flare ups, energy crisis in Europe and tightening financial conditions across the globe.
A half dozen central banks including in the United States, Britain, Sweden, Switzerland and Norway delivered rate hikes this week to fight inflation, but it was the Fed’s signal that it expects high U.S. rates to last through 2023 that caught markets off guard.
“Markets are digesting the global central bank hiking and messaging of ‘higher for longer’ as inflation fighting is front-and-center,” Mimi Duff, managing director at GenTrust, said in a note.
“We are in information-gathering mode at this point – some of the Fed hike/restrictive actions flow through nearly immediately (mortgage rates higher for instance), while some other factors take more time to flow through the economy – like layoffs, hiring plans, business investment etc.”
Dire outlooks from a handful of companies – most recently FedEx Corp and Ford Motor Co – have also added to woes in a seasonally weak period for markets.
The S&P 500’s estimated earnings growth for the third quarter is at 4.6% down from 5% last week, according to Refinitiv data.
“The likelihood of a U.S. recession in 2023 is increasing given the hawkish Fed. While it is widely understood that earnings estimates are too high given such recession risk, the market is unlikely to be able to look through falling earnings,” Citigroup said in a note.
Goldman Sachs cut its year-end target for the benchmark S&P 500 index by about 16% to 3,600 points, a 1.9% decline from current levels.
At 12:38 p.m. ET, the Dow Jones Industrial Average was down 683.65 points, or 2.27%, at 29,393.03, the S&P 500 was down 90.12 points, or 2.40%, at 3,667.87, and the Nasdaq Composite was down 259.07 points, or 2.34%, at 10,807.74.
All the three indexes were set for sharp weekly losses.
All the 11 major S&P sectors declined, led by a 7% slide in energy shares. Banks lost 3.5%.
Rate-sensitive technology and growth stocks dropped with Alphabet Inc, Apple Inc, Amazon.com, Microsoft Corp and Tesla Inc down between 1.3% and 4%.
Shares of Costco Wholesale Corp shed 2.4% after the big-box retailer reported a fall in its fourth-quarter profit margins.
The CBOE volatility index, also known as Wall Street’s fear gauge, rose to a three-month high of 30.87 points.
Declining issues outnumbered advancers for a 13.09-to-1 ratio on the NYSE and a 6.44-to-1 ratio on the Nasdaq.
The S&P index recorded no new 52-week high and 144 new lows, while the Nasdaq recorded seven new highs and 740 new lows.
(Reporting by Ankika Biswas and Devik Jain in Bengaluru; Editing by Shounak Dasgupta and Maju Samuel)