Wall Street had its worst day in two months on fears over Fed decisions to control inflation in the United States

Wall Street slumped on Tuesday and stocks had their worst day in two months, against a backdrop of concerns about tighter interest rates and future corporate earnings.

He S&P500 it was down 1.9% in afternoon trading, which would be its biggest drop since the market sold off in December. The industry average Dow Jones lost 650 points, or 1.9%, and stood at 33,190, while the Nasdaq composite lost 2.5 percent.

Home deposit suffered one of the biggest losses in the market after presenting financial forecasts that fell short of Wall Street expectations. It fell 6.3% despite reporting higher-than-expected earnings for the last three months of 2022.

The retailer said it would spend $1 billion to raise wages for hourly workers in the United States and Canada. That added to widespread concern in markets that rising costs for businesses are eating away at earnings, which are one of the main levers that determine stock prices.

The other main lever also seems precarious, since interest rates continue to rise. When safe bonds pay higher interest, stocks and other investments are less attractive. Why take a risk with stocks if the safest pays more? Higher rates also increase the risk of recession as they slow the economy in hopes of stifling inflation.

Rates and stock prices are high enough that Morgan Stanley strategists say U.S. stocks look more expensive than at any time since 2007.

The yield on the 10-year Treasury note, which helps fix interest rates on mortgages and other large loans, rose to 3.94% from 3.82% on Friday. The two-year yield, which is moving more in line with Fed expectations, fell from 4.62% to 4.72%. It is close to its highest level since November. If it exceeds that level, it will be at its highest level since 2007.

“That’s what’s weighing the market down,” said Keith Lerner, chief market strategist at Truist Advisory Services.

Yields have soared this month as Wall Street raises its expectation of the Federal Reserve raising short-term interest rates in its effort to fight inflation. The Federal Reserve has already raised its overnight interest rate to a range between 4.50% and 4.75%, from virtually zero at the start of last year.

Several better than expected economic reports have been released recently. This allays fears that the economy could soon enter a recession, which is positive for the market. But on the downside, they could also fuel upward pressure on inflation and give the Federal Reserve yet another reason to stick with the “higher and longer” rate campaign it advocates.

The latest data comes from a preliminary report released on Tuesday that suggests business activity is accelerating. According to S&P Global, the services sector should have returned to growth last month and reached its highest level in eight months. The manufacturing sector, meanwhile, continues to contract, but the reading hit a four-month high.

This strength has led the most pessimistic investors on Wall Street to maintain their recession forecasts, but to push back their timetable.

The Federal Reserve said in December that its policymaker expects short-term rates to rise to 5.1% by the end of this year with the first rate cut coming in 2024. Having previously thought that The Fed If the Fed would end up easing more than expected, Wall Street largely sided with the Fed’s view.

The concern is that the Federal Reserve could raise its rate forecast further next month when it releases its latest projections for the economy. In addition to showing stronger than expected labor markets and retail sales, the latest reports also suggest that inflation is not cooling as quickly and smoothly as expected.

These concerns have dampened Wall Street’s strong rise at the start of the year. After a previous rise of 8.9%, the S&P 500 is now clinging to a 4.3% gain since the start of the year.

Another threat to the market, according to Truist’s Lerner, is that the Federal Reserve won’t rush to cut rates in the face of economic weakness, as it has done in the past.

“This is the first time in over a decade that the Fed has had to worry about inflation,” he said. “What happened last year created scar tissue that could keep rates higher for longer.”

“When we have a downturn, the Fed won’t be as aggressive as they have been in the past. They can still think about inflation.

Although the labor market and consumer spending have held up to rising interest rates, some pockets of the economy are showing more weakness. A report on Tuesday showed occupied home sales slowed to their slowest pace in more than a decade.

Stocks in overseas stock markets were mostly down after manufacturing indicators in Europe and Asia showed a mixed picture and Russian President Vladimir Putin accused Western countries of threatening Russia.

(With AP information)

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