JPMorgan Chase & Co., one of the most heavily weighted stocks on the market, has fallen 6.5% in the first three months of the year even though it reported stronger profits than analysts expected. The nation’s largest banks said their main source of revenue will grow only slowly this year, below Wall Street expectations.
Companies are under constant pressure to generate greater profits. But it’s especially acute now given concerns that interest rates, another key determinant of stock prices, won’t move much higher in the near term.
A series of reports since the start of this year have shown that both inflation and the overall economy remain in worse shape than expected. That has forced traders to scale back their expectations for how many times the U.S. Federal Reserve may cut its key interest rates this year. Traders are primarily betting on just two rate cuts, down from at least six expected rate cuts at the start of the year, according to CME Group data.
Partly due to expectations for interest rate cuts, U.S. stock indexes were already breaking records. If interest rates are not eased, companies will need to generate higher profits to justify their stock prices, which critics say are too high by many measures.
This year’s rise in oil prices has further heightened concerns that upward pressure on inflation will increase further. Crude oil rose again on Friday amid continued tensions in the Middle East region. Israel has said it could attack Iran if Iran launches an attack from its territory, following the bombing of the Iranian consulate in Syria that killed Iranian generals.
Brent crude oil, the international standard crude, rose 0.8% to settle at $90.45 per barrel. The price briefly exceeded $92 during the day, but has returned to roughly the same level as in October.
At the same time, bond markets saw yields on U.S. Treasuries fall and the price of gold rise, a phenomenon that often occurs when investors flock to investments deemed safer.
The yield on the 10-year U.S. Treasury note fell to 4.51% from 4.58% late Thursday. Record-setting gold came close to hitting $2,450 an ounce for the first time before paring its gains.
Preliminary reports suggesting that US consumer sentiment is weakening also added to the tension. This is an important update because spending by U.S. consumers is the main driver of the economy.
Perhaps more concerning is that U.S. consumers may become more pessimistic about inflation. The outlook for inflation over the next 12 months is the highest since December. Such expectations can create a self-fulfilling prophecy in which purchases intended to anticipate price increases will only fuel inflation.
That’s why companies’ profits are under scrutiny. The downside of a significantly resilient U.S. economy is that it reduces the chance of rate cuts, but the upside is that it should support corporate sales and earnings.
David Lefkowitz, head of U.S. equities at UBS Global Wealth Management, said this has spread profit growth to more types of companies than just the Big Tech giants that dominated the market last year. .
As a result, he expects the S&P 500 index could end the year near the 5,200 level, about the same level as Thursday’s close. He said the index could even rise to 5,500 if inflationary pressures ease sooner or corporate profit growth is stronger than expected.
On Wall Street, Wells Fargo fell 0.4% after rising and falling throughout the day. It beat analysts’ expectations for overall profit for the latest quarter. However, net interest income, a key component of bank profits, was lower than expected.
Citigroup also fell 1.7% despite reporting better-than-expected results, while State Street rose 2.5%.
Overall, the S&P 500 fell 75.65 points to 5,123.41. The Dow Jones Industrial Average fell $475.84 to $37,983.24, and the Nasdaq Composite Index fell $267.10 to $16,175.09.
Banks are heading into earnings season, with analysts predicting the S&P 500 will grow for the third straight quarter, according to FactSet. This week will feature reports from major companies such as Bank of America, Johnson & Johnson, and UnitedHealth Group.
Federal Reserve Chairman Jerome Powell is scheduled to speak at a high-profile question-and-answer event with the Governor of the Bank of Canada on Tuesday. Other Fed officials are expected to make statements throughout the week that could shake up traders’ expectations about future interest rate movements and trigger the next move on Wall Street.
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AP writers Matt Ott and Zimo Zhong contributed.
