By Isabel Wang and Andrew Keshner
U.S. stocks closed mixed on Tuesday as investors followed the latest batch of company earnings, which reflected downbeat outlooks that could possibly foretell a coming recession.
Dow Jones Industrial Average still finished over 100 points higher for the third consecutive day of gains.
How stocks traded
On Monday, the Dow Jones Industrial Average rose 0.8%, the S&P 500 increased 1.2% and the Nasdaq Composite gained 2%. The Nasdaq ended Tuesday up 8.3% for the year, but down 29.4% from its November 2021 record high.
What drove markets
Wall Street investors on Tuesday struggled to build on two days of gains in the thick of the earnings reporting season. With the tech sector under pressure, 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 on earnings outlooks as technology companies such as Microsoft and Alphabet laid off scores of workers in a sector-wide downturn, but also that he thinks these companies will have to do more to make a meaningful effect on their cost base.
"It tells you that they saw a market slowdown in their business and that tells me that there's some weakness in sales growth. But to the cuts they made as a percentage of their employees are quite small, so it tells me that they saw something that was bad enough to justify an immediate reaction in head count," Conger told MarketWatch via phone.
Shares of 3M (MMM) finished 6.2% lower after a miss on earnings per share and guidance that did not meet analyst expectations. The Post-it maker said it is also planning to cut 2,500 jobs from its global manufacturing roles.
Johnson & Johnson (JNJ) shares were flat after the drug company reported earnings that beat profit estimates but missed revenue forecasts and full-year earnings outlook above estimates.
"The test of the market is this week and next week," said Quincy Krosby, LPL Financial's chief global strategist. The tone of forward guidance is a key part, she said. "Is guidance going to be overwhelmingly negative? Or perhaps neutral? The market is focused on this." If she had to give an interim grade, it's a pass, not a letter grade. "It's not failing, because we saw the market gain."
Shares of dozens of companies listed on the New York Stock Exchange (NYSE) were halted briefly after the opening bell due to a technical issue on Tuesday. Affected stocks included Verizon (VZ), Nike (NKE), McDonald's (MCD), AT&T (T) and Morgan Stanley (MS). The NYSE said it was investigating the issue.
With all three major U.S. stock indexes were up on the year so far, investors have showed increasing conviction that the Federal Reserve will further slow its pace of interest rate hikes as inflation eases and economic indicators weaken. The hope among investors has been that a less hawkish Fed will help the U.S. economy avoid a hard landing, which would support company earnings. However, investors also worry that a hard-landing recession could be coming still, that's why fourth-quarter earnings and forward guidance can be a way to read the tea leaves on what might be ahead.
"Hold onto your hats as this week's ride could be on the wild side. And judging by the wave of New Year optimism that markets seemed to have been surfing pretty happily, investors are ready to believe in soft landings," said Danni Hewson, AJ Bell financial analyst. "The question at hand is what kind of cushioning do some of the world's biggest companies have wrapped around them in case things end with more of a jolt?"
U.S. economic updates on Tuesday included the "flash" S&P U.S. manufacturing and services PMIs for January. The manufacturing PMI climbed to 46.7 from 46.2, a 31-month low The services PMI rose to 46.6 from 44.7. While both numbers are increasing month-to-month, any read below 50 points to a shrinking economy.
"The economy still might dodge a recession," said Bill Adams, chief economist for Comerica Bank in Dallas, Texas. "The first half of the winter has passed without energy shortages, China's economy is reopening and set to accelerate, and mortgage rates have pulled back a bit from their peaks last fall. But the many financial and economic indicators economists use to forecast business cycle turning points suggest that a recession is more likely near-term."
Companies in focus
--Jamie Chisholm contributed to this article.
(END) Dow Jones Newswires
January 24, 2023 16:42 ET (21:42 GMT)
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