Stocks fall as bank profits plummet

Stocks fall as bank profits plummet

US stock indexes swayed on Tuesday after sharply lower gains from two of the biggest investment banks and Chinese data showing a near-historic slowdown in economic growth.

The Dow Jones Industrial Average fell 391.76 points, or 1.1%, to 33910.85, weighed down by falls in shares in Goldman Sachs Group and property-casualty insurer Travelers.

The broad-based S&P 500 index fell 8.12 points, or 0.2%, to 3990.97. The technology-backed Nasdaq Composite rose 15.96 points, or 0.1%, to 11095.11 and is up for seven straight trading days, its best range since November 2021.

US stock and bond markets were closed on Monday to celebrate Martin Luther King Jr. Day.

Equities have started the year strong with investors positioned for a reduction in inflation which could lead to a change in central bank policy. The Federal Reserve aggressively raised interest rates in 2022 to tame inflation, sending stocks and bonds alike reeling.

The S&P 500 is up about 4% so far this year, and investors are looking for signs of a continuation of the rally.

“I’m pretty optimistic that we can keep climbing the wall of worry because everyone has been so pessimistic,” said Sandy Villere, portfolio manager at Villere & Co. Mr. Villere recommended investors switch to growth stocks rather than defensive companies because he believes that expects the Fed to stop raising interest rates soon. He buys stocks of small-cap growth companies, he said.

In terms of earnings, Goldman Sachs and Morgan Stanley both posted significantly lower earnings in the fourth quarter, reflecting a significant slowdown in business deals.

After missing Wall Street’s earnings estimate, Goldman saw its shares fall $24.08, or 6.4%, on the day to $349.92, making the bank the biggest drag on the Dow. In contrast, Morgan Stanley stock rose $5.42, or 5.9%, to $97.08 after sales and earnings beat expectations.

Economists and financial analysts look at bank earnings to get a sense of the health of the economy. WSJ’s Telis Demos explains how inflation and recession concerns can be reflected in their results. Pictured: Lorie Hirose

A number of other major banks, including JPMorgan, reported on Friday. Together they have set aside billions of dollars in loan loss provisions in anticipation of a recession.

However, some investors are unconvinced that a deep recession is imminent. “The likelihood of a recession is lower than expected,” said Jonathan Golub, a research analyst at Credit Suisse, who noted that inflation is slowing, profits are rising, wages are rising and consumer spending remains strong.

Although the earnings season has only just begun, more than 70% of the companies that reported have beaten their forecasts, according to Mr. Golub’s analysis as of Friday.

Mr Golub recommended investors buy shares in smaller regional banks over large ones, as the latter are more reliant on deals and trading activity, which could suffer this year.

Among others, shares of Travelers fell $8.92, or 4.6%, to $185 after the insurer announced a higher-than-expected estimate of its costs from winter storms, leaving investors worried about disappointments at other property insurers.

Silvergate Capital shares rose 13 cents, or 1%, to $13.33 for morning gains of nearly 30%. The crypto bank announced that it lost nearly two-thirds of its asset value in the quarter.

Roblox shares rose $3.91, or 12%, to $37.12 after the company — which operates a Metaverse-like space, or virtual place where people play and transact — reported December metrics showing the showed a re-acceleration of daily active users.

Stocks fall as bank profits plummet

U.S. indices have risen at the start of 2023, with the S&P 500 up more than 4% this year as of Friday’s close.

Photo: Michael M. Santiago/Getty Images

The benchmark 10-year Treasury yield was 3.534%, up from 3.510% on Friday as the recent rally in bond prices faltered. Yields rise when prices fall.

Among riskier assets, bitcoin prices stabilized above $20,000 for the first time since crypto exchange FTX collapsed. The cryptocurrency is still about 70% off its record high set in late 2021.

Chinese stock indexes fell as Beijing reported annual economic growth slowed to 3% last year, one of the slowest growth rates in decades last year. The shrinking population also remains a concern for investors. The shift marks a turning point in China’s history, with profound implications for its economy and status as the factory floor of the world.

In recent weeks, China’s reopening after three years of lockdown has given a boost to global markets, which have outperformed US stocks. Eric Theoret, global macro strategist at Manulife Investment Management, said his firm has been increasing its allocation to emerging markets since late last year.

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Hong Kong’s Hang Seng Index fell 0.8% and the Shanghai Composite Index fell 0.1%.

In Japan, the Nikkei 225 rose 1.2% as the Bank of Japan began its two-day monetary policy meeting. This meeting will be closely watched by investors after a surprise change in central bank yield curve control policy last month. The country’s 10-year government bond yield rose again above the Bank of Japan’s 0.5% ceiling on Tuesday.

The pan-continental Stoxx Europe 600 rose 0.4%.

Write to Anna Hirtenstein at [email protected] and Hardika Singh at [email protected]

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