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Wall Street sinks as early rally fizzles amid higher yields

Walt Disney Co.'s logo appears on a screen at the New York Stock Exchange.
Walt Disney Co. is working on a “strategic transformation,” Chief Executive Bob Iger announced Wednesday. The company reported stronger profit for the latest quarter than analysts expected and 7,000 job cuts.
(Richard Drew / Associated Press)
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Stocks dropped Thursday after another mixed set of profit reports from companies, as expectations for higher interest rates keep up the pressure on Wall Street.

The Standard & Poor’s 500 index fell 0.9%, the Dow Jones industrial average lost 0.7% and the Nasdaq composite sank 1%. All three indexes had been up nearly 1% in the morning before momentum gave out.

Stocks have been shaky this week, flipping from gains to losses and back again amid uncertainty about where interest rates and inflation are heading. A still-strong jobs picture has markets buying more into the Fed’s forecast that it will raise rates a couple of times more before holding them at a high level through this year. High rates can drive down inflation but also raise the risk of a severe recession and hurt investment prices.

A narrowing disconnect between markets and the Fed could lead to less volatility in markets in the future, said Thomas Martin, a senior portfolio manager at Globalt Investments. But for now, with a jumble of earnings reports pouring in from companies and questions remaining about whether the economy can avoid a sharp recession, swings are likely to continue.

“There’s continuing evidence that the economy is stronger than people thought it was going to be,” Martin said. “The question is what is the economy’s ability to continue that resilience in the face of interest rates that are a lot higher than they were a year ago.”

In the bond market, at least, a warning signal is continuing to flash red with yields on shorter-term Treasurys well above those on longer-term Treasurys. It’s an unusual occurrence that has often preceded past recessions.

The two-year Treasury yield, which tends to move with expectations for Fed action, climbed to 4.48% from 4.43% late Wednesday. It reached its highest level since mid-November during the day, according to Tradeweb. The 10-year Treasury, which helps set rates for mortgages and other loans, rose to 3.66% from 3.62%.

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“We’re still somewhere in that 40% to 60% area of a recession,” Martin said. “I’m not trying to be wishy-washy about it, but there are so many ways to go. The level of uncertainty has been high and remains high.”

High inflation and worries about a slowing economy have already hit corporate earnings, and big U.S. companies have recently been reporting relatively lackluster results for the end of 2022.

Walt Disney surprised the market when it reported stronger profit for the latest quarter than analysts expected. It also said it will cut about 7,000 jobs as part of a plan to reduce its costs by $5.5 billion. Its shares fell 1.3% after being up more than 5% earlier in the morning.

The media giant joins the growing list of high-profile companies to announce layoffs amid an uncertain economy. The bulk began in the technology industry, where companies acknowledged misreading the boom coming out of the pandemic and hiring too many people. But job cuts have since spread to other industries.

The earnings report came as Walt Disney Co. faces a challenge from an outsider, billionaire investor Nelson Peltz, who is seeking election to join the board.

“Things have gotten good on the inflation front, but now I think the next cause of volatility is beginning to shift to recession fears,” said Brent Schutte, chief investment officer at Northwestern Mutual Wealth Management Co.

Overall, though, the job market has remained resilient. Last week, 196,000 U.S. workers filed for unemployment benefits. That was slightly more than in the previous week, but it remained below the 200,000 level for a fourth straight week.

Although a strong job market is good for workers and for sales of companies selling to them, the Federal Reserve also worries that it could lead to upward pressure on inflation. If employers have to give big raises to keep and attract workers, the worry is that could force them to raise prices for their own products and services.

Shares of casino operators were strong Thursday after earnings reports raised optimism about momentum in both Las Vegas and Macao in Asia. MGM Resorts International climbed 6.4%, while Wynn Resorts rose 4.8%.

On the losing end was Baxter International, which dropped 12.1% after the healthcare company reported weaker quarterly profit than forecast. It also gave a forecast for earnings this year that fell below Wall Street’s expectations. Baxter also announced layoffs to cut costs, saying it would reduce its global workforce by less than 5%.

Mixed signals — including layoffs, strong job growth and lingering inflation — have clouded the U.S. economic outlook.

Mattel tumbled 10.7% after the toymaker reported a big decline in sales and weaker profit than expected for the all-important holiday quarter.

Another drop for Google’s parent company, Alphabet, also weighed heavily on the market. It fell 4.4%, continuing its rough week amid worries about competition from Microsoft, which recently unveiled a new Bing search engine powered by artificial intelligence.

All told, the S&P 500 fell 36.36 points to 4,081.50, the Dow lost 249.13 points to close at 33,699.88 and the Nasdaq slid 120.94 points to 11,789.58.

AP Business writers Damian J. Troise, Elaine Kurtenbach and Matt Ott contributed to this report.

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