Stock market today: Wall Street is mixed ahead of talks to avoid US bankruptcy

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NEW YORK (AP) Stocks moved cautiously on Monday as Wall Street waits to see if a crucial afternoon meeting will help the US government avoid a potentially catastrophic default on its debt.

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The S&P 500 was up 0.1% after its best week since March. The Dow Jones Industrial Average fell 118 points, or 0.4%, to 33,309 at 12:44 a.m. Eastern Time, while the Nasdaq composite was up 0.4%.

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The stock market is near its highest level since August, but has been floating largely within a tight margin for weeks as several major concerns weigh in. The biggest near-term risk is the possibility of a US bankruptcy, something that could happen as early as June 1.

That’s when Washington could run out of money to pay its bills unless Congress allows it to borrow more. Because government bonds are considered the safest investment in the world, economists and investors say a bankruptcy is likely to cause a recession for the economy and deep pain for financial markets.

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President Joe Biden and House Speaker Kevin McCarthy meet in the afternoon to discuss raising the debt limit. Talks have progressed from start to finish so far, with shares moving up in the middle of last week on hopes that progress could be made on a deal, only to falter on Friday when negotiations hit a roadblock. Talks continued throughout the weekend.

Another concern hanging over the market is the strength of the US banking system, which is beginning to crack under the weight of much higher interest rates. Three major US bankruptcies have shaken confidence since March, and investors are on the lookout for the next possible weak link.

PacWest Bancorp has received a lot of attention. The stock rose 14.8% after it said it agreed to sell a portfolio of real estate construction loans with about $2.6 billion in principal still outstanding to Kennedy Wilson, in addition to other assets.

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PacWest is one of the smaller and medium-sized regional banks that turned the spotlight on Wall Street in its search for the next possible bank to lose confidence. Other banks collapsed after depositors pulled their money in all at once to create grueling runs. PacWest’s stock is still down 73% for the year so far.

Elsewhere on Wall Street, Micron Technology fell 2.3% as tensions over security between China and the United States deepened. The Chinese government said on Sunday that Microns products have unspecified serious network security risks that could affect national security. It told users of sensitive computing devices to stop buying Micron products.

Meta Platforms rose 1.7% after shaking off news that European regulators fined it a record $1.3 billion. Meta called the decision flawed and unjustified. It said it would appeal.

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Meta has had a tear this year, more than doubling so far by 2023. Other Big Tech companies have also made powerful leaps, much stronger than the rest of the market.

But that split in performance, which has kept the overall S&P 500 resilient as many stocks weaken, has some market watchers worried. It made the index look top-heavy historically, meaning performance is more dependent on just a few handfuls of stocks than it has in decades.

Much of the excitement was about artificial intelligence, but that wasn’t enough to deflect some of Wall Street’s more pessimistic voices.

While we believe AI is real and likely to lead to some big efficiencies that will help fight inflation, it’s unlikely to prevent the deep earnings recession we predict for this year, Michael Wilson and other strategists at Morgan Stanley wrote in a statement. report.

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Earnings of large US companies are likely already in an earnings recession, while the S&P 500 is in the middle of its second quarter in a row reporting earnings declines from a year ago level. The question is how much worse they will get as the economy slows under the weight of much higher interest rates designed to bring inflation under control.

On the more optimistic side is Savita Subramanian, equity strategist at Bank of America. She raised her target for where the S&P 500 will end the year from 4,000 to 4,300. That’s not far off the current level, just below 4,200, but she also said in a BofA Global Research report that stocks outside of the behemoths at the top are likely to be behind most of the gains.

She pointed to improved corporate efficiencies, which should help make earnings more stable, while acknowledging all the risks that could keep stocks in a long-term down market, or so-called bear market.

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For the bear case, talk to the person next to you, she said, who can bring up anything from concerns about the Federal Reserve making a mistake on interest rate policy to the debt ceiling.

Bad news is in the air.

In the bond market, the yield on 10-year Treasury bills rose from 3.68% late Friday to 3.71%. It helps set rates for mortgages and other important loans. The two-year interest rate, which moves more in line with the Fed’s expectations, rose from 4.28% to 4.35%.

The hope is high that the Fed will ease up on interest rates by keeping them stable at its next meeting in June. That would be the first time it hasn’t raised rates at a meeting in more than a year.

On the foreign exchanges, the Japanese Nikkei 225 rose 0.9%, continuing a big run in recent weeks. The Hang Seng in Hong Kong rose 1.2%, while stock indices across Europe were mixed.

AP Business Writers Yuri Kageyama and Matt Ott contributed.