Wall Street Rally Fades as Corporate Profit Reports Ramp up

Stocks closed lower on Wall Street Monday after an early gain evaporated in the afternoon. The choppy trading came at the start of another busy week for profit reports from U.S. companies.

The S&P 500 fell 0.8%. The Dow fell 0.7% and the Nasdaq lost 0.8%. Gains for energy producers, big retailers and other companies that rely on consumer spending were outweighed by a pullback in health care and technology stocks.

Goldman Sachs rallied after reporting better profits than analysts expected. Dozens of big companies will give updates this week on how much profit they earned during the spring.

Markets have been lurching mostly lower for weeks on worries that the Federal Reserve and other central banks around the world will slam the brake too hard on the economy in hopes of bringing down high inflation. If they’re too aggressive with their interest-rate hikes, they could cause a recession.

But some on Wall Street are seeing signs for at least temporary optimism. Oil prices have come off their highs, though U.S. crude rose 5.1% Monday. A key report released last week also indicated expectations are easing for inflation among households. That could prevent a more vicious cycle from taking root and ease the pressure on the Federal Reserve.

Expectations have come down for how aggressively the Federal Reserve will raise interest rates at its meeting next week. Traders are now betting on a roughly one-in-three chance for a monster hike of a full percentage point, with the majority favoring a 0.75 percentage point increase. As recently as Thursday, the heavy bet was on a hike of a full point.

Economists at Goldman Sachs are among those forecasting a 0.75-point increase, which would match last month's hike, instead of a more aggressive one. They cited in particular the softening of inflation expectations after Chair Jerome Powell said last month that the Fed pays close attention to them.

Across the Atlantic Ocean later this week, investors expect the European Central Bank on Thursday to raise interest rates for the first time in 11 years to combat inflation. Many investors expect an increase of 0.25 percentage points, “but more is not unthinkable," economists wrote in a BofA Global Research report.

Interest rates are one of the two main levers that set prices for stocks. The other is corporate profits, which are under threat given high inflation and slowdowns in parts of the economy. For the moment, at least, analysts are still forecasting continued growth.

Earnings season kicked off last week, and banks have dominated the early part of the schedule for reporting how much they earned from April through June.

Goldman Sachs was among the latest to report, and it rallied 2% after its profit and revenue were better than analysts expected. Synchrony Financial rose 0.4% after it likewise topped forecasts for profit and revenue.

Bank of America added 0.1% even though it fell short of analysts' profit expectations. Despite all the worries about a possible recession, Bank of America said its customers' spending and deposits remain strong.

IBM is set to report its results after trading closes for the day. Johnson & Johnson, American Airlines and Tesla are among the dozens of S&P 500 companies that are scheduled to follow later in the week.

In markets overseas, Hong Kong’s Hang Seng index surged 2.7% after Chinese media reported that some stalled real estate projects had resumed construction after buyers threatened to stop their mortgage payments. Stocks in Shanghai added 1.6%.

Stocks also rose across much of the rest of Asia and Europe, with Germany's DAX returning 0.7%.

In the bond market, the yield on the 10-year Treasury slipped to 2.95% from 2.96% late Friday. The two-year yield, which rose to 3.17%, is still above the 10-year yield. Some investors see that as an ominous sign that could presage a recession in a year or two.

Underscoring worries about a recession have been recnet reports showing slowdowns in parts of the economy because of the Fed's rate hikes.

The housing market in particular has felt the effect of more expensive mortgage rates. A measure of sentiment among home builders relesed Monday weakened more than economists expected and sank to its lowest level in more than two years.