US Stocks Fall as Investors Fear Higher Interest Rates

The US stock market fell in volatile trading on Tuesday, adding to sharp losses in recent weeks as investors assessed the latest round of better-than-expected economic data, which points to more aggressive interest rate hikes from the Federal Reserve. The CNN Money Fear and Greed index showed some improvement in overall sentiment among US investors on Tuesday, but it remained in the “Greed” zone, indicating that investors are still optimistic about the market’s prospects. However, the index also suggested that investors are becoming more cautious and less willing to buy the dip, especially after the failure of Friday’s post-jobs rally.

Economic data boosts rate hike expectations

The main catalyst for the market’s decline on Tuesday was the strong economic data that showed that the US services sector grew at a faster rate than expected in August. The Institute for Supply Management (ISM) reported that its non-manufacturing index rose to 61.7 in August from 60.4 in July, beating the consensus estimate of 60.2. The index was the highest since June 2018 and indicated a robust expansion of the services sector, which accounts for about 80% of the US economy. The ISM also reported that its prices paid index, a measure of inflationary pressures, rose to 75.4 in August from 73.6 in July, reaching the highest level since July 2008.

US Stocks Fall as Investors Fear Higher Interest Rates
US Stocks Fall as Investors Fear Higher Interest Rates

The solid economic data has now led investors to bet on the Federal Reserve hiking interest rates more aggressively and for a longer period of time until inflation subsides. According to the CME FedWatch Tool, the market is now pricing in a 100% probability of at least one rate hike by June 2023, up from 90% a week ago. The market is also pricing in a 68% probability of at least two rate hikes by June 2023, up from 54% a week ago.

Bond yields surge, tech and energy stocks drag

The expectations of higher interest rates also pushed up the yields on government bonds, adding pressure to the selloff in stocks. The yield on the 10-year Treasury note jumped as high as 3.35%, while the yield on the 2-year Treasury rose to as much as 3.51%. Higher bond yields make stocks less attractive relative to fixed-income investments, especially for growth-oriented sectors such as technology and energy.

The technology and energy sectors led the market declines on Tuesday, with some of the biggest losers including Apple (-1.8%), Microsoft (-1.6%), Amazon (-1.5%), Tesla (-2.4%), Chevron (-2.3%), and Exxon Mobil (-2.1%). Some of the only bright spots on Tuesday came from defensive sectors such as real estate, utilities, and healthcare, which tend to perform well when interest rates are rising.

Earnings season continues

Despite the market’s weakness, some companies managed to report better-than-expected earnings results on Tuesday. Brady Corporation (BRC), a manufacturer of identification products and solutions, saw its shares gain more than 11% after it reported fourth-quarter earnings per share of $0.78, beating the consensus estimate of $0.67. The company also raised its full-year guidance for fiscal year 2023.

Investors are awaiting earnings results from Core & Main (CNM), a distributor of waterworks and fire protection products; American Eagle Outfitters (AEO), a retailer of apparel and accessories; and GameStop (GME), a video game retailer and meme stock favorite; today.

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