Dow falls over 150 points as rebound loses steam despite robust corporate earnings

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U.S. stocks traded lower on Thursday afternoon, giving up early session gains, as investors struggled to shrug off talk of further interest-rate hikes from the Federal Reserve officials while reassessing better-than-expected corporate earnings reports.

What’s happening?

  • The Dow Jones Industrial Average declined 166 points, or 0.5%, to 33,782.
  • The S&P 500 was off 21 points, or 0.5%, to 4,096.
  • The Nasdaq Composite lost 63 points, or 0.5%, to 11,845.

On Wednesday, the Dow fell 208 points, or 0.61%, to 33,949 as investors reacted to weak earnings and some hawkish commentary from a cluster of Fed officials, including New York Fed President John Williams and Fed governor Christopher Waller.

What’s driving markets

Strong results from Walt Disney Co. helped revive investors’ confidence overnight following a batch of weaker numbers from companies like eBay Inc. EBAY, Chipotle Mexican Grill CMG and Lumen Technologies Inc. LUMN a day earlier.

The Dow Jones Industrial Average advanced more than 300 points in the morning trade with shares of Salesforce Inc. and Walt Disney Co. leading the way for the blue-chip index before giving back the session’s gains. The S&P 500 and Nasdaq Composite were up 0.9% and 1.4% at session highs, respectively, according to Dow Jones Market Data.

Walt Disney Co. shares jumped after reporting better-than-expected earnings report, a smaller-than-expected drop in streaming video subscribers, and the layoff of 7,000 staff.

CEO Bob Iger said on CNBC’s “Squawk on the Street” Thursday morning that he was only expecting to stay in the role for two years. Meanwhile, activist investor Nelson Peltz of Trian Fund Management is ending his proxy battle with the company amid changes initiated by newly reinstalled chief executive Bob Iger. Shares of Disney were up 0.7% in afternoon trading, after rising as much as 5.7% to a five-month high earlier in the session.

See: Nelson Peltz ends Disney proxy fight in ‘a great win for all the shareholders’

Sheraz Mian, Research Director at Zachs Investment Research, said the Q4 earnings season shows that while growth is moderating and decelerating, it isn’t falling off the cliff that many appeared to fear could be in store.

“Businesses and households are starting to rein in their spending plans and a number of high-profile companies have announced major layoffs. The labor market still remains strong, helping support households’ purchasing power. But the overall operating landscape has become difficult for all companies. This puts a premium on management’s abilities to execute in a tough environment.”

Opinion: Watch the stock market closely now. If the S&P 500 breaks below 4100, the next stop could be 7% lower.

While corporate profits may have shrunk in the fourth quarter of 2022, companies have still managed to outperform Wall Street’s dour expectations, data show. In aggregate, S&P 500 firms have beaten Wall Street’s expectations by 1.6% so far since the start of earnings reporting season, according to Refinitiv data.

But that’s still below the long-term average of 4.1%. Investors have also digested cuts to forecasts and guidance from both Wall Street and the companies themselves, which is making some strategists nervous.

“My general sense is that earnings weren’t as bad as people feared. Investors have rewarded that but what’s making them nervous is the downtrodden guidance that management has given,” said Callie Cox, U.S. equity strategist at eToro, during a phone call with MarketWatch.

See: Deutsche Bank says there’s a 90% chance of recession. But, without one, the S&P 500 can get to 5,000.

Ultimately, the fact that Federal Reserve officials including Chairman Jerome Powell have largely stuck to their message this week has helped to keep stocks from falling off a cliff, said Gene Goldman, CIO of Cetera Financial Group.

“There were no surprises from the Fed, they continued to stick to their message. Powell didn’t reverse anything he said from his presser in Washington,” Goldman said, referring to Powell’s Q&A at the Economic Club of Washington D.C. on Tuesday.

However, in what could be a discouraging sign for equity investors, markets have started to come around to the Fed’s warnings about further interest rate rises, Goldman said.

He cited the rise in the 2-year Treasury yield which briefly touched its highest level since November earlier this week, as a sign that investors are beginning to factor in higher interest rates for longer. The 2-year yield was down slightly at 4.442% on Thursday.

See: Deeply inverted Treasury curve heads for 41-year milestone

Markets confronted a relatively quiet U.S. economic data calendar on Thursday. Weekly data on jobless claims showed the number of Americans who applied for unemployment benefits in early February rose by 13,000 to 196,000, but still hovered near pandemic-era lows.

Investors are already looking ahead to next week’s U.S. consumer-price inflation data for January, due out Tuesday, but before the week ends, they will receive an update on the University of Michigan’s consumer-sentiment gauge Friday morning in New York, as well as more commentary from senior Fed officials.

Inflation has waned over the past six months by a faster-than-expected pace, with headline CPI slowing to 7% year-over-year in December, down from a peak of more than 9% over the summer, which was the hottest inflation in more than four decades.

See: Why U.S. dollar bears don’t believe in the greenback’s big bounce

Companies in focus

  • PepsiCo rose 0.6% after reporting fourth-quarter earnings and revenue before the bell that beat expectations after price rises that boosted sales and announced a 10% increase in its dividend.
  • Hilton Worldwide was up 2.3% after the hotel chain reported adjusted fourth-quarter earnings and revenues that beat estimates.
  • Robinhood Markets Inc.  was down 2% after its board had cleared the company to pursue buying shares owned by FTX founder Sam Bankman-Fried despite the brokers’s fourth quarter revenues coming short of expectations.
  • Lumen Technologies jumped 4.4% after the telecoms company reported earnings and revenue that exceeded the consensus view, but came up far short in its 2023 projections for free-cash flow and adjusted earnings before interest, taxes, depreciation and amortization.
  • Credit Suisse Group AG ADRs tumbled 15.5% after the bank revealed that customers had pulled $100 billion from the struggling Swiss lender.
  • Shares of Chinese companies working on artificial intelligence products, including Baidu Inc. BIDU, Cloudwalk Technology Co. CN:688327and Beijing Haitian Ruisheng Science Technology Ltd. CN:688787, fell sharply after a state-media outlet published a commentary on the risks associated with ChatGPT-concept stocks.

— Steve Goldstein contributed to this report.

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