The stock market is forward-looking. That is a problem when there is not much to look forward to.
Stocks sank for the fourth straight day Tuesday, as investors looked past a series of outwardly positive earnings reports and fixated on threats to the nine-year bull market.
Foremost among them is the Federal Reserve. Super-low interest rates from the central bank have fueled much of the rally, pushing up the prices of stocks and bonds since the Great Recession.
Bad day for tech stocks
Shares of Alphabet, the parent of Google, dropped sharply Tuesday, dragging down these other tech darlings:
But that was then. Now the Fed is slowly withdrawing some of its support. It is shrinking its portfolio of government bonds and lifting interest rates. As a result, a yearslong tail wind for the stock market is disappearing.
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The new environment is evident in interest rates on government bonds, closely watched by many investors. The yield on the 10-year Treasury note touched 3 percent in trading early Tuesday. That benchmark interest rate — which influences the price of borrowing for both consumer loans and corporate bonds — has not been that high since early 2014.
It is not just interest rates. The threat of a trade war, or even a real war, is unnerving investors. Oil prices have spiked higher because of tensions in the Middle East, as well as President Donald Trump’s public musings about withdrawing the United States from its nuclear deal with Iran.
Those rising commodity prices represent something of a double worry for investors. For one thing, they feed into price inflation, making it even more likely the Fed will continue to raise interest rates. (One of the Fed’s main objectives is keeping prices stable.) At the same time, higher commodity prices eat into profit margins for companies, which is bad for their stock prices.
Last year, investors might have shrugged off those concerns, preferring to focus on the buoyant global economy and the prospect of a major reduction in U.S. corporate tax rates.
That tax cut came to fruition in December, and it supercharged corporate profits. But that was a one-time event.
Now other events are looming, and investors do not see much to be excited about. With congressional elections later this year, the prospects of pro-business legislation — or any legislation, for that matter — are dim. The biggest economic action out of Washington, D.C., might be the Fed raising interest rates — a clear negative for stock-market investors.
In short, it is up to companies themselves to give investors reasons to believe their shares can keep climbing.
Recent earnings reports suggest that is becoming harder to do. Shares of Alphabet, the parent of Google, dropped sharply Tuesday despite the company reporting Monday that quarterly profits rose 73 percent to $9.4 billion. Investors appeared concerned with a surge of spending at the company that hurt its profit margins.
Alphabet’s news dragged down other tech darlings, wiping almost $85 million in market value from the FANG stocks — which, besides Google’s parent, also includes Facebook (down 3.7 percent), Amazon (down 3.8 percent) and Netflix (off 3.6%).
The trend bodes poorly for Facebook and Amazon when they report their financial results in the next two days. Should the pattern continue, it’ll exacerbate pain for investors who poured money into the tech industry just as its biggest companies began faltering.
Earnings reports Tuesday also provoked a sell-off in the industrial firms 3M and Caterpillar. Investors were rattled by lower sales and profit forecasts and by sluggish demand for the products that 3M sells to auto- body shops. Its shares sank 6.8 percent.
And investors, after initially applauding Caterpillar’s first-quarter results, were unnerved when a Caterpillar executive told analysts that the first quarter might be a “high-water mark” for the year. The shares fell 6.2 percent.
The S&P 500 sank 35.73 points, or 1.3 percent, to 2,634.56. The Dow Jones industrial average finished with a loss of 424.56 points, or 1.7 percent, to 24,024.13. The Nasdaq composite dropped 121.25 points, or 1.7 percent, to 7,007.35.
Tuesday’s decline in the S&P left the benchmark index down 1.5 percent for the year. The market last reached a new high in late January.