NEW YORK (AP) — U.S. stocks are tumbling Thursday after a report suggesting flagging economic growth and still-high inflation hurt the hopes that have kept Wall Street high recently. A sharp drop for Meta Platforms, one of Wall Street’s most influential stocks, also dragged the market lower.
The S&P 500 was down 1.4% in early trading, slicing off two-thirds of what had been a big winning week so far. The Dow Jones Industrial Average was down 563 points, or 1.5%, as of 9:40 a.m. Eastern time, and the Nasdaq composite was 2.1% lower.
Meta Platforms, the parent company of Facebook and Instagram, dropped 14.1% even though it reported better profit for the latest quarter than analysts expected. Investors focused instead on big investments in artificial intelligence Meta pledged to make. AI has created a frenzy on Wall Street, but Meta is increasing its spending when it also gave a forecasted range for upcoming revenue whose midpoint fell below analysts’ expectations.
Expectations had built very high for Meta, along with the other “Magnificent Seven” stocks that drove most of the stock market’s returns last year. They need to hit a high bar to justify their high stock prices.
The entire U.S. stock market felt the pressure of another jump in Treasury yields following the disappointing data on the U.S. economy. The report pierced one of the main beliefs that had sent the S&P 500 to multiple records this year: The economy can remain rugged and support strong profits for companies, even if high inflation takes longer than expected to extinguish fully.
Instead, Thursday’s report suggested the U.S. economy’s growth slowed during the first three months 2024 to a 1.6% annual rate from 3.4% at the end of 2023. That was well below forecasts for 2.2% growth.
That by itself would have been disappointing. Making it worse for financial markets, the report also said inflation was hotter during the three months than economists forecast. That could tie the hands of the Federal Reserve, which normally juices sluggish economies by cutting interest rates.
Thursday’s economic data will likely get revised a couple times as the U.S. government fine-tunes the numbers. But the lower-than-expected growth and higher-than-expected inflation is “a bit of a slap in the face to those hoping” for a near-perfect scenario where the economy could escape recession while corralling high inflation, said Brian Jacobsen, chief economist at Annex Wealth Management.
“Things can change a lot from one quarter to the next, so it’s too early to say the Fed has failed, but this doesn’t help their cause.”
Treasury yields surged immediately after the economic report’s release as traders pulled back on bets for cuts to rates this year by the Federal Reserve.
The yield on the 10-year Treasury jumped to 4.72% from 4.66% just before the report and from 4.65% late Wednesday. The two-year Treasury yield, which more closely tracks expectations for the Fed, jumped back above 5% to 5.01% from 4.93% late Wednesday.
Traders are now largely betting on the possibility of just one or maybe two cuts to interest rates this year by the Fed, if any, according to data from CME Group. They came into the year forecasting six or more. A string of reports showing both inflation and the economy remaining hotter than forecast has crushed those expectations.
Top Fed officials themselves have hinted recently that they may need to keep rates high for a while to get full confidence inflation is heading down toward its target. The Fed has been keeping its main interest rate at the highest level since 2001. High interest rates slow the overall economy and hurt prices for investments.
With interest rates looking to stay high for a while, more pressure is on companies to deliver bigger profits.
Southwest Airlines fell 9.5% after the carrier reported worse results for the first quarter than analysts expected. CEO Robert Jordan said the airline was reacting quickly “to address our financial underperformance” and cope with delayed deliveries of new planes from Boeing. It will limit hiring, offer voluntary leave to employees and stop flying to four airports.
In stock markets abroad, Japan’s Nikkei 225 slid 2.2% as investors wait to hear whether the Bank of Japan will make any moves to prop up the tumbling value of the yen.
Indexes were mixed elsewhere in Asia and Europe.
