US stocks finished sharply lower after a news-packed week that bolstered confidence in the economy, but was offset by rising fears as speculation grew that the US Federal Reserve will raise interest rates more quickly.
The Dow Jones Industrial Average sank 467.20 points (2.75 percent) to 16,493.37 in its deepest weekly decline since January, while the broad-based S&P 500 tumbled 53.19 points (2.69 percent) to close on 1,925.15 and the tech-rich NASDAQ Composite Index lost 96.92 (2.18 percent) at 4,352.64.
The market’s most dramatic day was Thursday, when the Dow lost more than 300 points and gave up all its gains for the year. Analysts attributed the rout to a variety of factors, including weak eurozone data, disappointing earnings and Argentina’s debt default.
Yet on Friday, some analysts saw the previous day’s losses and the sudden rise in volatility over the week as having one catalyst above all others: worries over the timing of the Fed raising interest rates.
“It’s the Fed, because the market has been propelled by low rates,” S&P Capital IQ chief investment strategist Sam Stovall said. “So now the question is how much of that propulsion will be cut back?”
The central bank stuck to its dovish stance after concluding a two-day monetary policy meeting on Wednesday by keeping benchmark interest rates low for the foreseeable future. A Fed statement highlighted continued concerns about the labor market even as it dropped its previous expression of concern about low inflation.
Stovall and other analysts saw signs of increased economic strengthening this week that could accelerate the Fed hiking benchmark rates, which had been anticipated in the middle of next year.
Strong data points included a US Department of Commerce estimate that national economic growth was 4 percent in the second quarter; a jobs report for last month that kept alive a US economic streak of adding at least 200,000 jobs per month since February; and a report by the nonprofit Conference Board Inc showing that US consumer confidence in June hit the highest level since October 2007.
“The Fed is in play,” a Nomura Holding Inc note said on Friday.
“We are entering a new phase” where markets begin focusing on when and how fast rates rise, with implications for bond prices and the dollar, it added.
The week’s earnings reports lent further confidence to the sense the economy is improving, Stovall said. A week ago, analysts estimated that S&P 500 companies would report 8.3 percent higher earnings in the second quarter, but by Friday, following reports from 150 more companies, analysts projected earnings growth of 9.6 percent, according to S&P Capital IQ.
“Earnings are improving, economic growth is improving,” Stovall said. “The real question is what kind of effect that will have on inflation and as a result what kind of response will the Fed have in terms of raising the rates more quickly.”
Standout earnings this week came from Twitter Inc, which surged 15.6 percent on the week after revenues more than doubled on a 24 percent rise in active users, and Dow component Procter & Gamble Co, which notched a 38 percent rise in quarterly earnings to US$2.6 billion as it unveiled a plan to cut 90-100 underperforming brands. The company’s shares rose 3 percent on Friday after the announcement.
Disappointments included ExxonMobil Corp (minus-4.2 percent for the week), which reported a 5.7 percent drop in oil and gas earnings, even as quarterly profits grew 28 percent to US$8.8 billion.
Next week’s calendar has major earnings reports from AIG Inc, Walt Disney Co, Time Warner Cable Inc and others. Economic reports include data on the US trade deficit for June and the Institute for Supply Management’s index of service sector business activity for last month.
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