U.S. equities fell Monday as Wall Street braced for big company earnings reports slated for later in the week which could signal how inflation is impacting businesses.
The Dow Jones Industrial Average shed 140 points or 0.45%. The S&P 500 fell 1.1%, and the Nasdaq Composite dropped 2.3%.
Monday’s moves lower come on the back of worsening Covid trends in China, with Shanghai detecting its first case of the BA.5 subvariant and Macau closing its casinos for a week. Casino and hotel stocks fell on the news. Wynn Resorts and Las Vegas Sands shed 7.9% and 8.6%, respectively
“COVID headwinds aren’t just a Chinese phenomenon – cases are climbing globally, although the risk of lockdowns in the US and EU remains extremely low,” wrote Adam Crisafulli of Vital Knowledge.
Information technology and communication services slipped about 2% each, led by beaten-up tech shares. Alphabet, Tesla, and Netflix shed about 3% each. Boeing, Intel, and Walt Disney fell more than 2%, dragging down the Dow.
Twitter shares fell 6% after Elon Musk terminated a deal worth $44 billion to buy the social media company. The billionaire took issue with the number of bots and fake accounts on the platform and said Twitter wasn’t being truthful about how authentic activity on the platform was. However, the company said it gave Musk the information he needed to assess the claims.
Meanwhile, the 2-year Treasury yield hovered above its 10-year counterpart, an inversion many see as a recession indicator. The 2-year rate on Monday traded at 3.08%, roughly 2 basis points above the 10-year.
Investors this week are laser-focused on the start of corporate earnings season. The findings could signal how inflation and surging prices are hitting profits. PepsiCo and Delta Air Lines are scheduled to report earnings Tuesday and Wednesday. JPMorgan Chase, Morgan Stanley, Wells Fargo, and Citigroup are set to report at the end of the week.
“With recessionary fears weighing on the markets, investors are hyper-focused on corporate earnings for greater clues about the health of corporate America and the broader U.S. economy,” Greg Bassuk, chief executive officer at AXS Investments said.
“A sharper lens will be needed to dissect these earnings reports, as a strong second-quarter might be accompanied by very conservative outlooks,” he added. “As commodity and other producer costs remain high, companies will be factoring in the extent to which those heightened prices can be passed on to consumers and, likewise, how to keep earnings vigorous amid economic, geopolitical, and other key headwinds.
Wall Street is coming off a mixed session in which the Dow and S&P 500 fell slightly, while the Nasdaq Composite rose for a fifth straight day. All of the major averages secured a winning week after a stronger-than-expected jobs report Friday showed that the economic downturn worrying investors has not yet arrived and added to positive sentiment.
The jobs report, while good for the economy, could embolden the Federal Reserve to continue its aggressive rate hikes in the coming months to fight persistently high inflation. It will be tested with a slew of earnings from major banks and consumer inflation data this week on deck.
“While the markets ended in solid green for the week, investors should brace for continued volatility in July, with ongoing uncertainties looming with respect to inflation, Fed policy, recession concerns, and the enduring Russia-Ukraine war, all as we also move into corporate earnings season,” said Bassuk.
Investors are also looking ahead to the release of June’s consumer price index on Wednesday. It is expected to show headline inflation, including food and energy, rising above May’s 8.6% level to 8.8%, according to Dow Jones estimates.