Stocks Close Mixed on Wall Street; Goldman weighs in on Dow

Stock indices on Wall Street closed mixed on Tuesday as investors focused on a busy week of corporate earnings to understand how much damage inflation is doing to the economy.

The Standard & Poors 500 index fell 0.2%, ending a four-day winning streak. The Dow Jones industrial average fell 1.1%, mainly due to a big drop from Goldman Sachs after investment banks’ results fell well below analysts’ estimates as deal-making dried up.

Gains in tech stocks helped the Nasdaq composite post a 0.1% gain, extending the winning streak of tech-heavy indexes to a seventh day.

The mixed start to the curtailed holiday week follows a solid start to the year for Wall Street after a dismal 2022. The broader market is having its best week in two months, but investor sentiment could turn quickly as companies report their Q4 results. October to December.

Analysts expect companies in the S&P 500 to report earnings declines for the fourth quarter from a year earlier. That would be the first such drop since 2020, when the pandemic crushed the economy.

More importantly, investors are listening closely to corporate financial updates to better determine whether inflation will continue to weigh on consumers’ pockets and undermine corporate earnings.

We haven’t gotten much guidance from companies for the year ahead, and that’s really what we need to focus on, said Bill Merz, head of capital markets research at US Bank Wealth Management. And it may be that forward guidance remains substantively light because companies simply do not know.

Several banks reported encouraging financial results last week, but also said a mild recession is likely ahead for the US economy. Among the companies reporting their latest results this week: Netflix, M&T Bank and Procter & Gamble.

Goldman Sachs fell 6.4% on Tuesday after the investment bank reported dismal results.

Major communications companies, healthcare stocks and industrials were among the largest weights in the market. Netflix fell 2%, Pfizer fell 3.7% and Emerson Electric fell 6.8% for the biggest drop among S&P 500 stocks.

Stocks in the technology sector were a bright spot. Chipmaker Nvidia rose 4.8%.

All told, the S&P 500 fell 8.12 points to 3,990.97. The Dow dipped 391.76 points to 33,910.85. The Nasdaq rose 15.96 points to 11,095.11.

Small company stocks also returned some of their recent gains. The Russell 2000 Index fell 2.75 points, or 0.1%, to 1,884.29.

Bond yields remained relatively stable. The yield on the 10-year Treasury rose to 3.54% from 3.5% late Friday. In the US, bond and stock markets were closed Monday due to Martin Luther King Jr. Day.

Inflation and how the Federal Reserve will continue its battle against high prices remain the major concerns for investors as they review earnings results and corporate statements.

The outlook is very opaque right now because we are at a potential turning point in inflation, a potential turning point in [Fed] policy trajectory, and it remains to be seen to what extent the significantly tighter policy headwinds will feed through to the earnings picture in 2023, Merz said.

Wall Street will get another inflation update on Wednesday, when the government releases its December report on wholesale inflation, which tracks prices before passing them on to consumers. The government will also release retail sales data for December, which could give investors more insight into how inflation continues to affect consumer spending.

Consumer-level inflation has been declining for six months in a row, raising investor hopes that the Fed may soon consider easing interest rates. However, the central bank is so far adamant about raising rates further this year and does not see rate cuts until 2024 at the earliest.

The central bank raised its key overnight money rate from about zero a year ago to a range of 4.25% to 4.50%. The Fed will announce its next rate decision on February 1. Investors are largely predicting a hike of just 0.25 percentage points next month, down from December’s half-point increase and four previous 0.75 percentage point increases.