Dow posts third straight day of gains, but Nasdaq and S&P 500 end lower as investors await big tech earnings

By Isabel Wang and Andrew Keshner

U.S. stocks closed mixed on Tuesday as investors tracked the latest batch of corporate earnings, which reflected a pessimistic outlook that could possibly predict a coming recession.

The Dow Jones Industrial Average still finished more than 100 points higher for the third straight day of gains.

How the stocks traded

On Monday, the Dow Jones Industrial Average rose 0.8%, the S&P 500 rose 1.2% and the Nasdaq Composite gained 2%. The Nasdaq ended Tuesday up 8.3% on the year, but down 29.4% from its November 2021 record.

What drove the markets

Wall Street investors struggled on Tuesday to capitalize on two days of gains in the heart of the earnings season. With the tech sector under pressure, the focus is on Microsoft (MSFT) and Texas Instruments (TXN) as they report after the market close on Tuesday.

Brad Conger, deputy chief investment officer of Hirtle Callaghan & Co, said he would be nervous or cautious about the earnings outlook as tech companies such as Microsoft and Alphabet laid off dozens of workers in an industry downturn, but also that he thinks these companies will need to do more to have a meaningful effect on their cost base.

“That tells you they’ve seen a market downturn in their business and that tells me there’s some weakness in sales growth. But for the cuts they’ve made, the percentage of their employees is pretty low, so that tells me they saw something that was bad enough to warrant an immediate response in the headcount,” Conger told MarketWatch by phone.

Shares of 3M (MMM) ended down 6.2% after a loss in earnings per share and guidance that fell short of analysts’ expectations. The Post-it maker said it also plans to cut 2,500 jobs from its global manufacturing roles.

Shares of Johnson & Johnson (JNJ) held steady after the pharmaceutical company reported earnings above earnings estimates but missed revenue forecasts and a full-year earnings outlook above estimates.

“The market test is this week and next week,” said Quincy Krosby, chief global strategist at LPL Financial. The tone of foresight is key, she said. “Are the forecasts going to be extremely negative? Or maybe neutral? The market is focused on that.” If she were to give an intermediate grade, it’s a pass, not a letter grade. “It’s not a failure, because we’ve seen the market win.”

Shares of dozens of companies listed on the New York Stock Exchange (NYSE) were briefly halted after the opening bell due to a technical glitch on Tuesday. Stocks affected included Verizon (VZ), Nike (NKE), McDonald’s (MCD), AT&T (T) and Morgan Stanley (MS). The NYSE said it was investigating the matter.

With all three major U.S. stock indexes up year-to-date, investors have shown a growing belief that the Federal Reserve will further slow its pace of interest rate hikes as inflation wanes and indicators economies are weakening. Investors hope a less hawkish Fed will help the U.S. economy avoid a hard landing, which would support corporate earnings. However, investors are also worried that a brutal recession could still occur, which is why fourth quarter earnings and forecasts can be a way to read the tea leaves on what could be to come.

“Hold on tight, because this week’s ride could be wild. And judging by the wave of New Year’s optimism that markets seemed to have been riding quite happily, investors are ready to believe in soft landings,” said Danni Hewson, AJ. Bell Financial Analyst. “The question is, what kind of cushioning have some of the biggest companies in the world wrapped around them in case things end in another jolt?”

Tuesday’s US economic updates included S&P’s “flash” US manufacturing and services PMIs for January. The manufacturing PMI fell from 46.2 to 46.7, a 31-month low. The services PMI fell from 44.7 to 46.6. While both numbers are rising month over month, any reading below 50 indicates a declining economy.

“The economy could still dodge a recession,” said Bill Adams, chief economist at Comerica Bank in Dallas, Texas. “The first half of winter passed without power shortages, the Chinese economy is reopening and is expected to pick up speed, and mortgage rates have eased slightly from their highs of last fall. But the many Financial and economic indicators that economists use to predict the turn of the business cycle suggest that a recession is more likely in the near term.”

Companies in the spotlight

–Jamie Chisholm contributed to this article.

-Isabel Wang


(END) Dow Jones Newswire

01-24-23 1642ET

Copyright (c) 2023 Dow Jones & Company, Inc.

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