Nasdaq falls 1.2% to lead stock market lower as Fed decision, tech earnings await

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The tech-heavy Nasdaq Composite was leading stocks lower on Monday, kicking off a big week that features a Federal Reserve interest-rate decision, a jobs report and several key technology-sector earnings reports.

What’s happening

  • The Dow Jones Industrial Average was down 178 points, or 0.5%, at 33,799.
  • The S&P 500 index declined 41 points, or 1%, to 4,029.
  • The Nasdaq Composite dropped 187 points, or 1.6%, to 11,434.

Stocks rose last week, with the S&P 500 and Nasdaq ending Friday at highs for the new year. The S&P 500 has rallied 6% in January, and riskier plays such as the ARK Innovation ETF have done even better, with Cathie Wood’s flagship fund up 29% in 2023.

What’s driving markets

The Nasdaq Composite was shouldering the brunt of a cautious tone that’s taken hold in markets as a big week for both corporate earnings and macroeconomic data kicks off.

The Federal Reserve interest-rate decision will be coming Wednesday and nonfarm payrolls are set for release on Friday. The Fed is widely expected to deliver a 25-basis-point rate increase, downshifting from the outsize 50- and 75-basis-point increases seen last year. The Fed has signaled rates will top 5% and stay there, while markets have priced in cuts for the second half of 2023, setting up a potential clash.

“Monetary policy works with a lag, and we will likely be feeling the influence of higher rates of 2022 well into 2023,” said Matthew Miskin, John Hancock Investment Management’s co-chief investment strategist, in emailed commentary on Monday.

Miskin also warned that stocks have advanced to start the year, even through earnings estimates for the S&P 500 have been falling, causing the forward price-to- earnings ratio to reach its highest since August at 17.93x. “We see this valuation as a potential headwind and either looking for cheaper equity asset classes, or fixed income options, as attractive alternatives.”

Read: The Fed and the stock market are on a collision course this week. What’s at stake.

Over the weekend, The Wall Street Journal focused on Fed staffers’ view of inflation, and in particular their worries that job-matching will remain inefficient, which suggests price pressures could persist despite recent data showing a sharp decline in goods inflation.

See: Four ways Powell could tell markets the Fed isn’t ready to pivot

Seth Carpenter, chief global economist at Morgan Stanley, told clients in a weekend note that he doesn’t share those worries. Because of market concentration, there are higher profit margins, and therefore more room to let margins shrink after wage upswings. Combined with lower unionization rates compared with the 1980s, “all the information at hand simply points to a low probability that current wage inflation is a critical issue — even with services.”

Tech giants Apple Inc. Alphabet Inc. and Inc. highlight a huge slate of corporate earnings reports this week. Tech stocks in particular have rallied this month as bond yields have eased.

Also read: Could Big Tech layoffs keep growing? Apple, Amazon, Facebook and Google may give hints in biggest week of earnings.

The benchmark 10-year Treasury rate was edging higher, above 3.5% on Monday, but off the roughly 4.2% high in October.

“Major central banks are set to hike policy rates again this week and keep them higher, counter to market views for cuts this year,” a BlackRock Investment Institute team led by Wei Li, global chief investment strategist, said in a Monday client note. “We see this as disconnect resolving and favoring higher rates.”

Companies in focus

  • SoFi Technologies Inc. shares rallied 13.8% after the digital financial-services company exceeded expectations with its latest earnings and said that it expects to be profitable on a GAAP basis by the fourth quarter of this year.
  • Johnson & Johnson  shares fell 3.6% Monday, after The Wall Street Journal reported that a federal appeals court rejected the consumer products and drugmaker’s move to place its talc liabilities into bankruptcy.
  • Ford Motor Co. said Monday that it would be “significantly increasing” production of its Mustang Mach-E in 2023 and lowering prices as the company continues its efforts to improve supply of its electric vehicles and cut back on customer wait times. Ford shares fell 1.9%.
  • Berenberg analyst Adrian Yanoshik turned bullish on Tesla Inc. on Monday, citing improved valuation as concerns that Chief Executive Elon Musk will be distracted by his Twitter purchase have already been priced into the stock. Shares of the electric-vehicle maker were down 4.9%.

–Steve Goldstein contributed reporting to this article.

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