Wall Street equities dropped on Friday, led lower by financial shares, after a disappointing update from banking bellwether JPMorgan clouded an already mixed outlook for the US economy.
The blue-chip S&P 500 share index fell 0.4 per cent, following a 1.4 per cent decline on Thursday.
The technology-heavy Nasdaq Composite edged 0.1 per cent lower, following a 2.5 per cent fall in the prior session.
JPMorgan said on Friday that it would fall short of an important profitability target this year. Its shares were down 5.5 per cent in early afternoon New York dealings. The S&P’s banking sub-index dropped 2.2 per cent as American Express, Capital One Financial, Goldman Sachs and Morgan Stanley were also all under pressure.
Financial stocks have outperformed the wider market so far this year as investors latched on to a narrative that economic recovery from the pandemic would allow them to easily switch winning bets from the lockdown-boosted tech sector to more cyclical businesses. But disruption from coronavirus, surging inflation and uncertainty about when price rises will peak have made economic trends difficult to forecast, analysts say.
“The market was behaving as if we were in the early stages of an economic cycle,” said Geraldine Sundstrom, a managing director and portfolio manager at Pimco.
“But then, the big acceleration from reopening [from 2020’s coronavirus shutdowns] are behind us,” she added.
“So nerves are raw and whatever will scare people has an exaggerated tendency to do so.”
On Friday, data also showed that US retail sales fell 1.9 per cent in December, the sharpest year-on-year drop in 10 months. A consumer sentiment index by the University of Michigan dived to almost a decade low, with survey respondents citing inflation as a more serious problem than unemployment. US consumer prices rose at an annual pace of 7 per cent last month, the fastest rate of increases in almost 40 years.
US corporate earnings season picks up next week, with more companies poised to report their figures for the last three months of 2021 and their outlooks for the coming year.
Investors said they expected to scrutinise how factors such as growing wage pressure, price inflation and a tight labour market were affecting executives’ financial forecasts.
Companies listed on the blue-chip S&P 500 index are forecast to post year-on-year earnings growth of about 22 per cent, according to analyst estimates collated by data provider FactSet.
“If inflation heads higher then the fear factor really does come in,” said Aneeka Gupta, research director at ETF provider WisdomTree.
Officials at the Fed, whose main funds rate affects borrowing costs and stock market valuations worldwide, have signalled their support for the first interest rate rise of the pandemic era in March.
Swaps markets have priced in a gradual pace of increases, with the funds rate ending the year at 1 per cent or below.
“The market is probably underestimating what the Fed will need to do,” said Lale Akoner, senior market strategist at BNY Mellon. “There are upside risks to interest rates and inflation.”
Elsewhere in markets, Europe’s Stoxx 600 share index closed 1 per cent lower.
In government debt markets, the yield on the US 10-year Treasury note, which moves inversely to its price, added about 0.05 percentage points to 1.76 per cent.
The dollar index, which measures the greenback against six other currencies, added about 0.4 per cent.
Brent crude, the oil benchmark, rose 1.1 per cent to $85.42 a barrel.