Dow ends down 250 points as bond yields rise with earnings mixed

What drove markets?

Strong results from Walt Disney Co.
DIS,
-1.27%
helped to initially revive investors’ confidence overnight following a batch of weaker numbers from companies like eBay Inc.
EBAY,
-1.57%,
Chipotle Mexican Grill
CMG,
-1.86%
and Lumen Technologies Inc.
LUMN,
+1.27%
a day earlier.

Walt Disney Co. shares jumped in the morning session after reporting better-than-expected earnings report, a smaller-than-expected drop in streaming video subscribers, and the layoff of 7,000 staff.

See:Nelson Peltz ends Disney proxy fight in ‘a great win for all the shareholders’

However, the selloff in Google-parent Alphabet Inc.
GOOG,
-4.54%
continued with shares of the technology giant falling 4.4%, dragging the tech-heavy Nasdaq Composite lower. The company unveiled new artificial-intelligence-powered features, an AI chatbot system, on Wednesday which showed an inaccurate answer to a search query. 

Sheraz Mian, Research Director at Zachs Investment Research, said the Q4 earnings season shows that while growth is moderating and decelerating, it isn’t falling off the cliff that many appeared to fear could be in store.

“Businesses and households are starting to rein in their spending plans and a number of high-profile companies have announced major layoffs. The labor market still remains strong, helping support households’ purchasing power. But the overall operating landscape has become difficult for all companies. This puts a premium on management’s abilities to execute in a tough environment.”

See: Retail investors are more bullish on stocks than at any point since the Fed started hiking rates. Here’s why that could be a problem.

While corporate profits may have shrunk in the fourth quarter of 2022, companies have still managed to outperform Wall Street’s dour expectations, data show. In aggregate, S&P 500 firms have beaten Wall Street’s expectations by 1.6% so far since the start of earnings reporting season, according to Refinitiv data.

But that’s still below the long-term average of 4.1%. Investors have also digested cuts to forecasts and guidance from both Wall Street and the companies themselves, which is making some strategists nervous.

“My general sense is that earnings weren’t as bad as people feared. Investors have rewarded that but what’s making them nervous is the downtrodden guidance that management has given,” said Callie Cox, U.S. equity strategist at eToro, during a phone call with MarketWatch.

See: Deutsche Bank says there’s a 90% chance of recession. But, without one, the S&P 500 can get to 5,000.

Ultimately, the fact that Federal Reserve officials including Chairman Jerome Powell have largely stuck to their message this week has helped to keep stocks from falling off a cliff, said Gene Goldman, CIO of Cetera Financial Group.

“There were no surprises from the Fed, they continued to stick to their message. Powell didn’t reverse anything he said from his presser in Washington,” Goldman said, referring to Powell’s Q&A at the Economic Club of Washington D.C. on Tuesday.

However, in what could be a discouraging sign for equity investors, markets have started to come around to the Fed’s warnings about further interest rate rises, Goldman said.

He cited the rise in the 2-year Treasury yield
TMUBMUSD02Y,
4.492%,
which briefly touched its highest level since November earlier this week, as a sign that investors are beginning to factor in higher interest rates for longer.

The yield on the 2-year Treasury note rose 5.5 basis points to 4.507% on Thursday, the highest since Nov. 22. The 10-year Treasury note yield
TMUBMUSD10Y,
3.662%
advanced 4.7 basis points to 3.682%. That’s the highest level for the 10-year yield in over a month.

See: Deeply inverted Treasury curve heads for 41-year milestone

Markets confronted a relatively quiet U.S. economic data calendar on Thursday. Weekly data on jobless claims showed the number of Americans who applied for unemployment benefits in early February rose by 13,000 to 196,000, but still hovered near pandemic-era lows.

Investors are already looking ahead to next week’s U.S. consumer-price inflation data for January, due out Tuesday, but before the week ends, they will receive an update on the University of Michigan’s consumer-sentiment gauge Friday morning in New York, as well as more commentary from senior Fed officials.

Inflation has waned over the past six months by a faster-than-expected pace, with headline CPI slowing to 7% year-over-year in December, down from a peak of more than 9% over the summer, which was the hottest inflation in more than four decades.

See: Why U.S. dollar bears don’t believe in the greenback’s big bounce

Companies in focus

• PepsiCo
  PEP,
  +0.95%
  finished 1% higher after reporting fourth-quarter earnings and revenue before the bell that beat expectations after price rises that boosted sales and announced a 10% increase in its dividend.

• Hilton Worldwide
  HLT,
  +2.39%
  was up 2.4% after the hotel chain reported adjusted fourth-quarter earnings and revenues that beat estimates.

• Robinhood Markets Inc. 
  HOOD,
  -3.72%
  was down 3.7% after its board had cleared the company to pursue buying shares owned by FTX founder Sam Bankman-Fried despite the brokers’s fourth quarter revenues coming short of expectations.

• Lumen Technologies
  LUMN,
  +1.27%
  jumped 1.3% after the telecoms company reported earnings and revenue that exceeded the consensus view, but came up far short in its 2023 projections for free-cash flow and adjusted earnings before interest, taxes, depreciation and amortization.

• Credit Suisse Group AG
  CS,
  -15.64%
  ADRs tumbled 15.6% after the bank revealed that customers had pulled $100 billion from the struggling Swiss lender.

• Shares of Chinese companies working on artificial intelligence products, including Baidu Inc. BIDU, Cloudwalk Technology Co. CN:688327and Beijing Haitian Ruisheng Science Technology Ltd. CN:688787, fell sharply after a state-media outlet published a commentary on the risks associated with ChatGPT-concept stocks.

–— Steve Goldstein contributed to this report.