Nasdaq Retreats as Weak Economic Data Stokes Recession Fears

The S&P 500 and the Nasdaq finished in the red on Tuesday as worries that aggressive moves to curb decades-high inflation might tip the U.S. economy into recession dampened investors' appetite for risk.

All three major U.S. stock indexes pared their losses in afternoon trading, with the blue-chip Dow turning positive. Even so, the S&P 500 settled within percentage points of confirming it has been in a bear market since reaching its all-time high on Jan. 3.

"As we step back and acknowledge the primary market catalysts, it’s really been about the Fed pivot and the change in interest rates, which have influenced prices across the capital markets," said Bill Northey, senior investment director at U.S. Bank Wealth Management in Helena, Montana.

"In the last two weeks, we’ve seen some degree of macroeconomic deterioration starting to be manifested in corporate earnings and economic releases."

Much of the sell-off was driven by a profit warning from Snap Inc., which sent the company's shares plummeting and sparking contagion throughout the social media segment.

Meta Platforms Inc., Alphabet Inc., Twitter Inc. and Pinterest Inc. all ended the session lower, as did the broader S&P 500 Communications Services sector .

Global supply chain disruptions have been exacerbated by Russia's war with Ukraine and restrictive measures in China to control its latest COVID-19 outbreak, sending inflation to multi-decade highs.

The U.S. Federal Reserve has vowed to aggressively tackle persistent price growth by hiking the cost of borrowing, and minutes from its most recent monetary policy meeting, expected on Wednesday, will be parsed by market participants for clues regarding the speed and extent of those actions.

Investors currently expect a series of 50-basis-point rate hikes over the next several months, fueling fears that the central bank could push the economy into recession, a scenario that is increasingly being baked into analyst projections.

"Tomorrow we look to the FOMC [Federal Open Market Committee] minutes for any signs that the approach to monetary policy may lean further hawkish or dovish than was laid out at the last meeting," U.S. Bank Wealth Management's Northey said.

Data released on Tuesday painted a picture of waning economic momentum, with new home sales plunging and business activity decelerating.

Fed Chair Jerome Powell's counterpart in Frankfurt, European Central Bank President Christine Lagarde, said she expects the ECB deposit rate to be raised at least 50 basis points by the end of September,

Unofficially, the Dow Jones Industrial Average rose 50.82 points, or 0.16%, to 31,931.06, the S&P 500 lost 31.54 points, or 0.79%, to 3,942.21 and the Nasdaq Composite dropped 270.83 points, or 2.35%, to 11,264.45.

Apparel retailer Abercrombie & Fitch Co tumbled after posting a surprise quarterly loss and cutting its annual sales and margins outlook.

Work-from-home darling Zoom Video Communications Inc jumped following its full-year profit forecast hike due to solid enterprise demand.