Wall Street slumped on Thursday, as investors took a harder look at the recent rally in stocks and rise in bond yields.
Stocks have rallied sharply this year boosted by hefty deal activity, share buybacks, and hopes of a rate cut by the Federal Reserve. These factors largely offset an expected decline in the pace of corporate earnings.
But in the past three weeks, interest rate futures have steadily priced out expectations for an ease in Fed policy this year, and long-dated Treasury yields have risen to their highest levels since last August.
"Earnings are slowing and interest rates are rising," said Michael Kastner, portfolio manager at SterlingStamos. "It doesn't make sense to hold stocks in the near term, the market has come too far, too fast. While the economy may not require a rate cut, it's not strong enough to improve earnings growth."
The annual growth in first-quarter earnings for S&P 500 companies was 8.1 per cent, but analysts polled by Thomson Financial are predicting growth of only 3.4 per cent for the current quarter.
Stocks suffered their worst daily performance in two weeks, and the S&P 500 index closed 1 per cent lower at 1,507.51. Among the major S&P sectors, utilities – whose prices tend to be driven by their high dividend yields – were down 2.7 per cent thanks to rising bond yields.
Earlier in the day the index reached a high of 1,529.31 as investors cheered a surge in new home sales. That mood quickly soured when the possible implications of an 11 per cent annual decline in home prices for the overall housing market were digested.
When the S&P June futures contract hit a high of 1,532.50, traders said a sharp bout of selling pushed the contract below 1,520 – the contract ultimately fell to a low of 1,507.80 – and pressured the cash market.
Technology was hit hard by selling in semiconductor stocks and with earnings warnings from Network Appliance, down 16.55 per cent at $31.76, and Computer Associates, down 8.15 per cent at $25.57.
The Nasdaq Composite closed 1.5 per cent lower at 2,537.92. The Philadelphia semi-conductor index slid 1.7 per cent, clipping its rise for the year to 2.2 per cent as investors have become increasingly bearish about the sector.
Shares in Intel lost 3.1 per cent to $21.97 and the chipmaker also weighed upon the Dow Jones Industrial Average, which fell 0.6 per cent to close at 13,441.13.
Merger and acquisition activity was led by the news that Advanced Medical Optics was interested in buying Bausch & Lomb, which agreed to a $3.67bn buy-out from Warburg Pincus last week. The eye product maker's shares rose 5.7 per cent to $70.21, while AMO lost 3.2 per cent to $41.10.
Meanwhile Alcoa reaffirmed its intention to buy Alcan, in spite of the Canadian aluminium producer's rejection of the hostile bid on Wednesday. Alcoa fell 0.4 per cent to $40.21, and Alcan lost 1.75 per cent to close at $84.39.
Dow Jones were 2 per cent lower at $51.70, after the Bancroft family – which controls 64 per cent of Dow Jones through a special class of stock – met privately on Wednesday to discuss the $60-a-share offer made by News Corp, whose stock was down 2.1 per cent at $23.39.
In earnings news, the weakness in the housing market tolled for Toll Brothers, the builder of luxury homes.
Toll posted a 79 per cent decline for its fiscal second-quarter profit, as the company wrote down property values and refused to provide earnings guidance. Toll's share price rebounded sharply higher after the new homes data, but it pared some of its gains and closed 1.1 per cent higher at $30.07. Other homebuilders held some of their earlier gains and the S&P homebuilders index rose 0.4 per cent, reducing its decline so far this year to 12.9 per cent.
Retailers delivered their latest earnings on Wednesday. Abercrombie & Fitch posted a 7 per cent gain in its first-quarter profit and its shares were 2.2 per cent higher at $82.61.
Limited Brands, which includes retailer Victoria's Secret, said earnings fell 46 per cent in the first quarter and it cut its full-year earnings outlook. Its shares closed 1.55 per cent lower at $26.05.
