U.S. Stocks Fall Amid Earnings Concerns as Fed Rate Bets Rise

  • Alcoa tumbles after quarterly profit misses estimates
  • Chance of December boost in borrowing costs climbs toward 68%

The Likelihood of Three Fed Rate Hikes by End of 2017

The S&P 500 Index fell to an almost four-week low as an early batch of disappointing corporate results damped optimism over a rebound in earnings, while growing speculation that the Federal Reserve will raise interest rates this year undermined demand for riskier assets.

Equities suffered the worst decline in a month, with Alcoa Inc. tumbling the most in seven years as its earnings missed estimates. Health-care shares were the biggest losers, weighed down by Illumina Inc.’s 25 percent plunge after it said sales were lower than anticipated. Commodity producers retreated as a gauge on the dollar reached a two-month high, and chipmakers saw their biggest drop in four weeks.

The S&P 500 slid 1.2 percent to 2,136.73 at 4 p.m. in New York, with losses accelerating in afternoon trading as the gauge fell below its average price during the past 100 days. The Dow Jones Industrial Average lost 200.38 points, or 1.1 percent, to 18,128.66. The Nasdaq 100 Index declined 1.5 percent following a fresh record on Monday, and the CBOE Volatility Index jumped 15 percent to a three-week high. About 6.7 billion shares traded hands on U.S. exchanges, in line with the three-month average.

“We’ve got several factors weighing on the market right now,” said Alan Gayle, a senior strategist at RidgeWorth Investments. “Earnings, politics, Fed and oil taking a breather after a strong run. Typically, companies step over earnings guidance and the early news is that may not be happening. Investors have gotten news from multiple sources that are making them increasingly nervous and the market’s selling off.”

It’s not the beginning to the earnings season investors had hoped for, with S&P 500 companies forecast to post a sixth consecutive decline in profits and trading at more than 18 times estimated earnings, compared with a 15.6 average for the past five years. In addition to the selloffs in Alcoa and Illumina, Fastenal Co. fell the most in 20 months after the industrial supplier’s profit missed predictions, and Seagate Technology Plc lost 7.6 percent after forecasting higher expenses.

“Alcoa is always the first off and seen as a bellwether for industrial demand,” Chris Gaffney, president of world markets at St. Louis-based EverBank, said by phone. “People need to see strong earnings, especially with the thought that rates will start moving higher. The environment for companies is going to get less accommodating. The drivers today and going forward are going to be earnings.”

Meanwhile, traders boosted odds for a December rate hike to nearly 68 percent, from 64 percent on Friday and about 50 percent two weeks ago as encouraging data signaled the U.S. economy is strong enough to cope with higher borrowing costs. They are pricing in a 17 percent chance of a move next month. Chicago Fed President Charles Evans told reporters in Sydney that a December move “could be fine,” after arguing in a speech to keep rates low until core inflation moves higher.

Investors will also look to data and minutes from the Fed’s September meeting, which will be released on Wednesday, for clues on the health of the world’s biggest economy and the likely trajectory of interest rates. Reports on retail sales, producer prices and consumer sentiment are due Friday.

“I think the only rationale for having valuations where they are is in the context of low interest rates,” said Mark Heppenstall, the Horsham, Pennsylvania-based chief investment officer of Penn Mutual Asset Management, which oversees about $20 billion. “If the bond market begins to show signs of weakness, that could spill over into pressure on equity prices.”

Treasuries fell Tuesday amid bets that inflation will pick up, with 30-year bond yields touching the highest since June. All of the S&P 500’s 11 main industries retreated, with health-care companies dropping to a three-month low amid the biggest selloff since June, while raw-materials fell 1.3 percent. Phone, real estate and consumer-staples companies were the only ones to lose less than 1 percent.

Illumina posted its steepest drop in five years after saying third-quarter sales were lower than it previously anticipated because of declining demand for its high-speed genetic sequencers. Health-care equipment stocks saw their biggest slump since June’s Brexit vote, with Abbott Laboratories falling 5.4 percent, the most since April.

Alcoa’s slide dragged raw-materials to a three-month low, with the aluminum producer capping its worst day since March 2009. Freeport-McMoRan Inc. lost 3.1 percent and International Paper Co. declined 2.3 percent.

Intel Corp. decreased 2 percent to pace a retreat among chip stocks, the worst performers today in the broader tech group. Micron Technology Inc. and Applied Materials Inc. sank at least 2.5 percent.

Banks in the benchmark index slumped 0.9 percent, even as rising bond yields signaled the potential for better earnings prospects. Citigroup Inc. and Bank of America Corp. fell more than 1.1 percent.

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