NEW YORK — Stocks closed lower on concerns about a potentially toxic cocktail for financial markets, where economic growth appears to be fading even as inflation remains high. A sharp decline in Meta Platforms, one of Wall Street's most influential stocks, also dragged down the market. The S&P 500 fell 0.5% on Thursday, after matching a 1.6% decline earlier. The Dow Jones Industrial Average fell 1%, and the Nasdaq Composite returned 0.6%. U.S. Treasury yields rose after the government reported higher-than-expected inflation in the first three months of the year. Economic growth also slowed more than expected.
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NEW YORK — U.S. stocks fell on Thursday on concerns about a potentially harmful cocktail for financial markets, where economic growth is slowing even as inflation remains high. A sharp decline in the parent company of Facebook, one of the most influential stocks on Wall Street, also weighed on the market.
The S&P 500 was down 0.4% in late trading after losing 1.6% in early trading. The Dow Jones Industrial Average fell 371 points, or 1%, after dropping more than 700 points earlier. The Nasdaq Composite Index was down 0.6% with less than an hour left in trading.
Metaplatforms, which operates Facebook and Instagram, fell 10.7% even though it reported profit for its latest quarter that beat analysts' expectations. Investors took note of Mehta's promised massive investment in artificial intelligence. While AI is stirring up excitement on Wall Street, Meta also provided a range of projected future earnings, with the midpoint below analysts' expectations, and increased spending.
Expectations were high for Meta, along with the other “Magnificent Seven” stocks that drove much of last year's stock market returns. A high bar needs to be reached to justify the high stock price.
The overall US stock market felt further pressure on US Treasury yields following disappointing indicators on the US economy. The report puts the S&P 500 on record this year, saying the economy can avoid a deep recession and support strong corporate earnings, even if high inflation takes time to be fully brought under control. One of the expectations that had led to this was met squarely.
This is what Wall Street calls a “soft landing” scenario, and there have even been recent hopes for a “no-landing,” in which the economy avoids recession altogether.
But Thursday's report showed U.S. economic growth slowed to 1.6% in the first three months of this year from an annual rate of 3.4% at the end of 2023.
It was weaker than expected and that alone would have been disappointing. Making matters worse for financial markets, the report also said that inflation in the past three months was higher than economists expected. That could tie the hands of the Federal Reserve, which typically cuts interest rates to revitalize a sluggish economy.
Thursday's economic data is likely to be revised several times as the U.S. government tweaks the numbers. But the weaker-than-expected growth and higher-than-expected inflation is “a bit of a blow for people hoping for a 'no-landing' scenario,” said Brian Jacobsen, chief economist at Annex Wealth Management.
“It's too early to say the Fed has failed, as things can change significantly from quarter to quarter, but this doesn't help their cause.”
Beneath the surface, the economic report may not have been as bad as initially thought. Much of the slowdown was due to increased imports and other factors that can fluctuate sharply and rapidly. U.S. household spending, the main driver of the economy, remained relatively steady. The concerns raised by the report were allayed and the market was able to pare its morning losses, but the threat is not gone.
U.S. Treasury yields remained elevated as traders refrained from betting on the Federal Reserve cutting interest rates this year.
The yield on the 10-year U.S. Treasury rose to 4.70% from 4.66% just before the report, and from 4.65% late Wednesday.
Traders are primarily betting that the Fed will cut interest rates once or twice this year, according to data from CME Group. They had expected inflation to rise more than six times this year after slowing noticeably towards the end of 2023. Those expectations were dashed by a series of reports this year showing that inflation remains higher than expected.
Government officials themselves have said they may keep interest rates high for a while before lowering the Fed's key interest rate from its steepest level since 2001. High interest rates slow the overall economy and negatively impact investment prices, while lower interest rates could lead to a reacceleration of inflation.
This puts pressure on companies to deliver greater profits.
Southwest Airlines fell 7.6% after reporting worse-than-expected first-quarter results. Chief Executive Officer Robert Jordan said the airline was taking measures such as hiring restrictions to “address financial distress” and deal with delays in the delivery of new planes from Boeing Co. Ta.
Textron fell 8.9% after the maker of Bell Helicopter and Cessna jets reported lower-than-expected profits and revenue. Caterpillar fell 6.3% despite reporting better-than-expected profits. Sales for the latest quarter were below analysts' expectations.
IBM also fell 8.6% despite reporting better-than-expected profits. The company's revenue similarly fell short of analysts' expectations, as the company announced it would acquire HashiCorp in a deal that values the multicloud infrastructure automation company at $6.4 billion.
The winner was Carrier Global, which rose 8.7% after reporting better-than-expected results. We were able to squeeze more operating profit out of each dollar of revenue.
In overseas stock markets, Japan's Nikkei stock average fell 2.2% as investors waited to see if the Bank of Japan would take any steps to support the decline in the yen.
In other parts of Asia and Europe, the index was mixed.