U.S. stocks fell after Federal Reserve comments that some sectors have excessive valuations overshadowed better-than-estimated bank earnings. The dollar strengthened while Treasuries traded little changed as Chair Janet Yellen told lawmakers stimulus was still required.
The Standard & Poor’s 500 Index fell 0.2 percent, while the Russell 2000 Index of smaller companies sank 1 percent after the Fed said in a report that valuations of some biotechnology and social-media stocks may be “substantially stretched.” JPMorgan Chase & Co. and Goldman Sachs Group Inc. jumped. U.S. crude fell below $100 a barrel for the first time since May. Ten-year Treasury yields held at 2.55 percent, near a six-week low. The dollar gained against most major peers and gold fell.
The Fed must press on with economic stimulus as “significant slack” remains in labor markets and inflation is still below the central bank’s goal, Yellen said in testimony before the Senate Banking Committee. Retail sales data today showed a broad-based increase in June, which probably helped the U.S. economy’s rebound in the second quarter. JPMorgan Chase said second-quarter profit beat analysts’ estimates and Goldman Sachs reported a surprise increase in earnings.
“The Fed wants to pay attention to valuations given that they might have to change the interest rate backdrop that has been a strong catalyst for the market,” Eric Teal, who helps oversee about $3.6 billion as the chief investment officer at First Citizens BancShares Inc. in Raleigh, North Carolina, said by phone. ‘The small cap area is going to be much more interest rate sensitive.’’
Yellen repeated comments from last month that the Fed will keep benchmark interest rates low for a considerable time after ending its asset-purchase program, even as it saw improvements in the economy and job market.
“A high degree of monetary policy accommodation remains appropriate,” Yellen said today. “Although the economy continues to improve, the recovery is not yet complete.”
Yellen cited labor-market weaknesses even after an unexpectedly fast decline in unemployment put pressure on Fed officials to consider accelerating their timetable for an interest-rate increase.
Minutes from the Fed’s June meeting, released last week, showed some policy makers were concerned investors may be growing too complacent about the economic outlook and the central bank should be on the lookout for excessive risk-taking.
The Fed said in a separate report released today that “valuation metrics in some sectors do appear substantially stretched, particularly those for smaller firms in the social media and biotechnology industries, despite a notable downturn in equity prices for such firms early in the year.”
The Dow Jones Internet Composite Index slipped 0.7 percent. The gauge had rallied 15 percent from a low reached May 8 to erase its losses for the year before falling 3.2 percent last week. The measure surged 54 percent in 2013.
Pandora Media Inc., which trades at more than 160 times projected earnings, fell 1.2 percent. Facebook Inc. and TripAdvisor Inc., which rallied more than 98 percent in 2013, lost at least 1.1 percent.
The Nasdaq Biotechnology Index slid 2.3 percent, after falling 3.2 percent last week, the most since April. The gauge had rallied as much as 23 percent from a low reached that month.
The Standard & Poor’s Smallcap 600 Index trades at 26 times reported profit and the Nasdaq biotechnology measure has a valuation of more than 500, according to data compiled by Bloomberg. The broader S&P 500 has a price-earnings ratio of 18, the most expensive level since 2010.
The comments in the Fed report spurred a “short-term reaction” in markets, Walter “Bucky” Hellwig, a Birmingham, Alabama-based senior vice president at BB&T Wealth Management, said by phone. “What it did is throw some cold water on some of the better earnings reports that were out earlier and had the markets on a roll.”
The valuations remarks also overshadowed data today showing U.S. retail sales rose 0.2 percent in June after a 0.5 percent advance in May that was larger than previously reported. The New York Fed’s Empire manufacturing report unexpectedly rose to 25.6 for this month from 19.28 last month.
The S&P 500 climbed 0.5 percent yesterday, the most since July 3, to rebound from its worst week since April. Profit at S&P 500 companies probably rose 4.5 percent in the three months through June while sales advanced 3.1 percent, analyst estimates compiled by Bloomberg show.
JPMorgan Chase climbed 3.5 percent and Goldman Sachs rose 1.3 percent to lead an index of banks to the biggest advance among 24 groups in the S&P 500. The two lenders posted the steepest gains in the Dow Jones Industrial Average, with the 30-stock index up less than 0.1 percent today.
Both firms reported fixed-income revenue that topped estimates. Banks have seen a tapering of profits in recent quarters as the Fed slowed its bond buying program and fixed-income clients made fewer bets amid low volatility.
Wells Fargo & Co., the most valuable U.S. bank, reported a 3.8 percent increase in second-quarter profit last week on lower credit costs, while Citigroup Inc. said yesterday that net income fell 96 percent as the company agreed to pay $7 billion to resolve a mortgage-related probe. Bank of America Corp., the second-biggest U.S. lender by assets, is scheduled to report results tomorrow.
Lorillard Inc. dropped more than 10 percent after Reynolds American Inc. reached an agreement to buy its rival for $27.4 billion including debt. Reynolds lost 6.9 percent.
Intel Corp., the world’s biggest maker of semiconductors, gained more than 4 percent in extended U.S. trading after forecasting third-quarter sales that exceeded some analysts’ predictions after markets closed.
Apple Inc. and International Business Machines Corp. rose in after-hours trading as the two companies said they will work together to create business-software applications for iPhone and iPad users. Apple added 1.6 percent in extended trading, while IBM gained 2.3 percent.
The Stoxx Europe 600 Index sank 0.4 percent after yesterday rallying the most in a week. Software AG declined 19 percent after the Darmstadt, Germany-based company lowered its operating-margin forecast, dragging technology companies down for the second-biggest decline among 19 industry groups. Draegerwerk AG slumped 16 percent after the maker of medical equipment cut its projection for sales growth.
Banco Espirito Santo SA tumbled 15 percent to the lowest price in data going back to 1993. The bank’s subordinated bonds also tumbled as 847 million euros ($1.15 billion) of short-term debt sold by a company linked to the Portuguese lender falls due today.
Rioforte Investments SA, a holding company of the Espirito Santo group, owes the money to Portugal Telecom SGPS SA, according to a June 30 regulatory filing by the nation’s biggest phone company.
The British pound advanced 0.4 percent to $1.7143 and added 0.7 percent to 79.15 pence per euro. The Office for National Statistics said annualized U.K. inflation quickened to 1.9 percent in June from 1.5 percent in May. That compared with a 1.6 percent forecast by analysts surveyed by Bloomberg.
The Bloomberg Dollar Spot Index, which tracks the greenback against 10 major counterparts, rose to the highest level since June 24, adding 0.2 percent. The dollar climbed 0.1 percent to 101.68 yen after rallying the most yesterday against Japan’s currency since July 3. The euro added 0.4 percent to $1.3568, the strongest level since June.
Gold futures fell 0.7 percent to settle at $1,297.10 an ounce, the lowest close since June 18 after yesterday posting the steepest one-day drop since December, 2013.
Corn futures slid 1.7 percent after yesterday rebounding from a four-year low. Seventy-six percent of corn and 72 percent of soybeans were in good or excellent condition as of July 13, the best shape for that time of year since 1994, U.S. Department of Agriculture data released yesterday showed.
West Texas Intermediate oil fell 0.9 percent to $99.96 a barrel in New York, the lowest settlement price since May 6. WTI slid amid signs of a recovery in Libyan exports, stable output in Iraq and the highest U.S. crude production in almost three decades.
The MSCI Emerging Markets Index rose 0.3 percent to close at its highest level since February 2013. South Korea’s Kospi index jumped 0.9 percent, advancing for a second day as exporters gained. Stocks in Dubai rose 3.4 percent, sending the benchmark index back into a bull market three weeks after a selloff ended the longest rally since 2005.
China reports second-quarter gross-domestic product data tomorrow, with analysts expecting the economy expanded 7.4 percent from a year earlier, matching the rate of growth in the first three months of the year. June retail sales and industrial production are also due.