Dow closes nearly 500 points lower as weak economic data rattle markets

What drove markets

US investors were forced to confront a handful of weak economic data, which helped to stoke fears about the outlook for corporate profits and guidance. Expectations for S&P 500 corporate earnings over the coming year have remained surprisingly robust this year, analysts said, leaving room for companies to share disappointing earnings and guidance when the second-quarter earnings season begins next month.

On Tuesday, the Conference Boards consumer-confidence index dropped in June to a 16-month low of 98.7, as Americans grew more worried about high gas and food prices and the health of the economy. Economists polled by The Wall Street Journal had forecast the index to drop to 100 from a revised 103.2 in May. Meanwhile, the Richmond Fed Manufacturing Index came in at -19, the lowest reading since May 2020.

These data reminded investors about the possibility that the US economy might already be in a recession something that ARK Invests Cathie Wood discussed during a television interview Tuesday morning.

Theres some nervousness that companies will miss their numbers or deliver negative guidance, said Steve Sosnick, chief strategist at Interactive Brokers.

Earnings expectations havent really been lowered in the face of economic news that seems to dictate that we should [lower expectations]† And the market is going to have to reconcile this over the next month or so, he added.

According to FactSet, analysts expect earnings for S&P 500 companies to grow by 4.3% during the second quarter, which would be the slowest pace of quarterly earnings growth since the fourth quarter of 2020. Those expectations have been downgraded by a full percentage point since March but Sosnick and others fear expectations could worsen further between now and the start of the second-quarter earnings season.

John Lynch, chief investment officer for Comerica Wealth Management, warned that poor consumer confidence readings risked becoming self-fulfilling, which could in turn threaten an economic contraction in the US

The persistent weakness in confidence surveys suggests a recessionary environment can become self-fulfilling, said John Lynch, chief investment officer for Comerica Wealth Management, in emailed comments.

Fears about the possibility of a recession in the US have caused defensive stocks like utilities and healthcare to outperform since the start of the year, while momentum stocks like tech have been among the worst-hit. That trend continued on Tuesday, as the tech-heavy Nasdaq led the main US benchmarks lower.

Earlier in the session, US stocks and travel-related companies in particular had gotten a boost on the news that the Chinese government had shortened its quarantine time for international travelers.

Beijing also loosened its testing requirements for people in quarantine.

In other news, six of the biggest US banks said they have enough capital to either maintain or hike their dividends to shareholders after setting enough aside to handle the most extreme economic conditions expected in the coming year.

Wells Fargo & Co. WFC,
-0.15%
and Goldman Sachs Group Inc. GS,
-0.43%
both increased their payouts by 20%, while Morgan Stanley MS,
+0.93%
delivered an 11% rise. Bank of America Corp. BAC,
-0.28%
increased its dividend by 5%, while Citigroup Inc. c,
-1.30%
and JPMorgan Chase & Co. JPM,
-0.48%
held their dividend flat. Shares of the largest US banks generally outperformed on Tuesday.

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The yield on the 10-year Treasury note BX:TMUBMUSD10Y rose 1.3 basis points to 3.206%. Yields and debt prices move opposite each other.

In a television interview, New York Fed President John Williams said he expected the US economy would see a slowdown, but not a recession as the central bank aggressively tightens monetary policy in an effort to rein in inflation. Williams said he expected policy makers to debate whether to hike rates by another 50 or 75 basis points when they meet in July, after delivering a 75 basis point increase earlier this month the largest since 1994.

Data also showed the US trade deficit in goods narrowed by 2.2% in May to $104.3 billion. The S&P CoreLogic Case-Shiller 20-city index posted a 21.2% year-over-year gain in April, up slightly from 21.1% in the previous month. In April, the 20-month index rose a seasonally adjusted 2.3%. A separate report from the Federal Housing Finance Agency showed a 1.6% monthly gain. And over the last year, the FHFA index was up 18.8%.

Read: Should the Fed start selling its mortgage holdings at a loss to fortify its inflation fight?

Single stock movers

• Nike Inc. NKE shares fell 7% after the apparel maker beat earnings estimates but was cautious on margins and on China in particular. But Chinese stocks advanced after a loosening of quarantine requirements in the worlds second-largest economy.

• JetBlue Airways Corp.
  JBLU,
  -0.34%
  once again raised its offer for discount carrier Spirit Airways Inc.
  save,
  +1.11%
  as it attempts to outbid rival Frontier Group Holdings Inc.
  ULCC,
  +0.64%†
  JetBlue shares fell 0.3%, Spirit shares gained 1.1% and Frontier shares were up 0.6% amid a positive tone across the airline sector. The popular US Global Jets ETF
  JETS,
  -0.76%
  fell 0.8%.

Other markets

• The ICE US Dollar Index DXY,
  +0.52%†
  a measure of the currency against a basket of six major rivals, rose 0.6%.

• Bitcoin BTCUSD,
  +0.42%
  was down 2.8% near $20,260.

• Oil futures rose, with the US benchmark CL.1,
  +2.07%
  settling 2% higher at $111.76 a barrel. gold futures GC00,
  -0.18%
  fell 0.2% to settle at $1,821.20 an ounce, a near two-week low.

• The Stoxx Europe 600 SXP,
  +0.27%
  rose 0.3%, while London’s FTSE 100 UKX,
  +0.90%
  advanced 2.7%.

• The Shanghai Composite SHCOMP,
  +0.89%
  and Hong Kong’s Hang Seng Index HSI,
  +0.85%
  each ended 0.9% higher, while Japanese Nikkei 225 NIK,
  +0.66%
  pink 0.7%.