Dow drops more than 100 points, stocks fall ahead of key inflation report

U.S. stocks tumbled on Tuesday as worries over global economic growth dented investor appetite for risk assets and Wall Street braced for June inflation data.

The Dow Jones Industrial Average dropped 192.51 points, or 0.62%, to 30,981.33, while the S&P 500 slid 0.92% to 3,818.80. The Nasdaq Composite fell 0.95% to settle at 11,264.73.

“There’s a lack of a catalyst, a lack of a leadership right now,” said Truist’s Keith Lerner. “Growth is slowing and global central banks are still in tightening mode and I think that’s concerning the markets.”

Stocks dove in the final hour of trading after struggling to pick a direction throughout the day. The major indexes fluctuated between gains and losses, with the Dow up as much as 172 points and down more than 300 points.

Investors on Tuesday appeared to be shunning riskier assets such as stocks in favor of traditional safe havens such as U.S. Treasurys and the dollar. The 10-year Treasury yield fell about 1 basis point to about 2.98%.

Some beaten-up tech bounced on Tuesday but gave up those gains later in the session. Salesforce and Microsoft each fell more than 4% while Netflix and Alphabet shed more than 1%. Amazon dropped more than 2%. Twitter shares, which have been volatile after Elon Musk terminated his deal to purchase the social media company, added 4.3%.

Airline stocks rallied on Tuesday after American Airlines said it expects total revenue in the second quarter to top 2019 levels. The stock soared 10% on the news while United, Delta, and Southwest climbed 8.1%, 6.2% and 4.6%, respectively.

Meanwhile, battered cruise stocks Norwegian and Carnival jumped 5.8% and 7.5%, respectively. Boeing shares climbed 7.7% as deliveries hit their highest monthly level since March 2019.

All major sectors finished the day in the negative led by energy, which tumbled 2% as oil prices declined on fears of a global slowdown. Halliburton and Devon Energy each dipped about more than 2%.

Earnings season begins

PepsiCo kicked off the corporate earnings season on Tuesday, reporting a better-than-expected quarterly profit and revenue and raising its revenue outlook for the year. Delta Air Lines and JPMorgan Chase are among the companies slated to report later this week.

Market participants are keeping a close eye on downside risk to earnings forecasts as companies grapple with rising interest rates and greater inflationary pressures, and Wall Street debates the likelihood of a recession.

The impact, however, won’t hit until companies post third-quarter earnings, said Chris Zaccarelli, chief investment officer for Independent Advisor Alliance.

“Our expectations are that earnings should be as good or better than expected because we don’t think the headwinds have really started to meaningfully impact companies yet,” he said. “We do agree with the consensus that on a going-forward basis, things are going to get more difficult and we are concerned about a slowdown in earnings or a potential earnings recession.”

Businesses able to pass off high commodity prices are well-positioned to stand out this earnings season, Lerner said. But not all businesses have found success in pushing costs onto customers and many companies are getting squeezed by the costs of goods and rising wages.

“What I’m seeing is this inflection point where businesses are starting to become a bit more pessimistic about passing along higher input costs,” said Jeffrey Roach, chief economist at LPL Financial. “If firms are having trouble managing input costs, that clearly translates into the squeezing of profit margins, so earnings will downshift from here.”

The dollar strengthens

The dollar index, which measures the U.S. currency’s performance against six other currencies, popped to 108.56. That gain brought the euro to parity with the U.S. dollar and to its lowest level since 2002 as recession fears heighten in Europe.

The dollar index has been on fire this year, rising roughly 13%. Several Wall Street strategists have warned that this strength in the U.S. currency could spell trouble for corporate earnings ahead.

“The surging USD is a symptom of global unease and will make life even more difficult for Corporate America,” and international central banks, creating further headwinds for earnings per share, wrote Adam Crisafulli of Vital Knowledge.

Inflation is also on investors’ radars this week with June’s consumer price index report set for release Wednesday. The headline inflation number, including food and energy, is expected to rise to 8.8% from May’s level of 8.6%, according to estimates from Dow Jones.

“The bottom line is that inflation may stay elevated for another month or two,” wrote Art Hogan, National Securities’ chief market strategist, but June’s core reading should indicate “some sequential improvement.”