NEW YORK (AP) — Just a day after rallying on hopes that the Federal Reserve is about to cut interest rates, U.S. stocks tumbled Thursday after weak data raised concerns that the Fed may have missed its opportunity to do so before harming the economy's growth.
The S&P 500 sank 1.4% after a report indicated U.S. manufacturing activity is still contracting, with the contraction accelerating. Manufacturing has been heavily affected by high rates, and the report from the Institute for Supply Management erased the early morning gains for U.S. stock indexes.
The Dow Jones Industrial Average dropped 494 points, or 1.2%, and had fallen by over 700 points earlier in the day, while the Nasdaq composite dropped by 2.3%.
The bond market also reacted strongly, with the yield on the 10-year Treasury dropping below 4%, returning to levels last seen in February. In addition to the disappointing manufacturing data, reports in the morning showed a spike in U.S. workers applying for jobless benefits and an improvement in productivity for U.S. workers during the spring.
Combined, the data likely alleviates inflation concerns and provides the Federal Reserve with more flexibility to cut interest rates. A day earlier, yields declined after Fed Chair Jerome Powell hinted that inflation may have slowed enough to justify rate cuts starting in September.
However, the data also raise concerns that the Fed may have kept rates elevated for too long in an effort to control inflation. The Fed has maintained its main interest rate at a two-decade high for about a year, making it costlier to borrow for housing, cars, or credit card purchases. The full impact of a rate cut on the economy may take several months to a year to materialize.
“Markets are considering whether the Federal Reserve should have cut rates yesterday,” said Jamie Cox, managing partner for Harris Financial Group.
Stocks of companies closely tied to the economy's strength experienced significant declines. Energy stocks in the S&P 500 dropped 2.6%, while industrial companies in the index weakened by 1.8%.
The small stocks in the Russell 2000 index plummeted by 3%, following a surge last month due to hopes of a robust economy alongside declining interest rates.
The weak economic data intensifies the anticipation for the upcoming employment report on Friday. Economists predict a slight slowdown in U.S. hiring last month, with hopes for a moderate reading that does not elevate inflation or worsen recession fears.
However, the figures may be skewed due to the impact of Hurricane Beryl, cautioned Kevin Khang, senior international economist at Vanguard, suggesting the headline number may appear worse than the actual fundamentals.
The S&P 500 would have seen greater losses on Thursday if not for Meta Platforms, the company behind Facebook and Instagram, which climbed 4.8% following a quarterly earnings report that exceeded analyst expectations.
Uncertainty surrounded the report, particularly after other members of the influential “Magnificent Seven” stocks failed to meet investor expectations. These Big Tech stocks, driven by artificial intelligence technology, propelled numerous S&P 500 records this year before sentiments shifted last month amid concerns of overvaluation.
Other technology firms faced investor skepticism. ARM Holdings posted better-than-expected profits and revenue for the quarter, yet its U.S.-listed shares still dropped by 15.7%. Despite impressive numbers, the U.K. chip company did not revise its revenue and profit forecasts for the fiscal year.
Among the “Magnificent Seven” stocks, Amazon and Apple were notable decliners, each falling by at least 1.6% ahead of their earnings reports released after market close.
Overall, the S&P 500 declined by 75.62 points to 5,446.68. The Dow saw a 494.82-point drop to 40,347.97, and the Nasdaq tumbled by 405.25 points to 17,194.15.
In the bond market, the 10-year Treasury yield fell to 3.97%, down from 4.04% the previous day and 4.70% in April. Traders are united in their belief that the Federal Reserve will cut rates in September, with the only question being the frequency of cuts this year and next.
Across the Atlantic, the Bank of England made its first interest rate cut since the onset of the COVID-19 pandemic in early 2020. The FTSE 100 in London dropped by 1% after erasing earlier gains, while stock indexes weakened across Europe and Asia.
Japan's Nikkei 225 fell by 2.5%. The Bank of Japan's interest rate hike a day earlier strengthened the yen against the U.S. dollar, potentially impacting exporters' profits. Toyota's stock plummeted by 8.5% in Tokyo on Thursday despite reporting a profit increase.
AP Business Writers Yuri Kageyama and Matt Ott contributed.
