Wall Street drops as mounting growth concerns weigh on tech, financials

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By Devik Jain and David French

(Reuters) - Wall Street's main indexes were on course to post their third straight day of declines on Thursday, as traders sold financial and technology stocks on fears the Federal Reserve's aggressive approach to rein in inflation could trigger a recession.

The Fed lifted rates by an expected 75 basis points on Wednesday and signaled a longer trajectory for policy rates than markets had priced in, fuelling fears of further volatility in stock and bond trading in a year that has already seen bear markets in both asset classes.

The U.S. central bank's projections for economic growth released on Wednesday were also eye-catching, with growth of just 0.2% this year, rising to 1.2% for 2023.

"Going forward, the market is going to be hypersensitive to any sort of Fed comments and data coming up. I would expect more volatility as the market digests them, but at the same time we're cautiously optimistic," said Brian Klimke, director of investment research at Cetera Financial Group.

"Valuations are a lot better than they were at the start of the year, earnings estimates have been lowered that makes it easier to beat. So, a lot of the bad news is factored in right now ... we are creating a market where there are potential upside surprises now."

As of Friday, the S&P 500's estimated earnings growth for the third quarter is at 5%, according to Refinitiv data. Excluding the energy sector, the growth rate is at -1.7%.

The S&P 500's forward price-to-earnings ratio, a common metric for valuing stocks, is at 16.8 times earnings - far below the nearly 22 times forward P/E that stocks commanded at the start of the year.

Seven of the 11 major S&P sectors declined, led by a drop of 1.9% in consumer discretionary and 1.3% in financial stocks.

Shares of megacap technology and growth companies such as Apple Inc (NASDAQ:AAPL), Amazon.com Inc (NASDAQ:AMZN), Tesla (NASDAQ:TSLA) Inc and Nvidia (NASDAQ:NVDA) Corp fell between 0.7% and 4.9% as benchmark U.S. Treasury yields hit an 11-year high. [US/]

Rising yields weigh particularly on valuations of companies in the technology sector, which have high expected future earnings and form a significant part of the market-cap weighted indexes such as the S&P 500.

The S&P 500 tech sector has slumped 27.8% so far this year, compared with a 20.9% decline in the benchmark index.

"I definitely see the market testing the June lows and there is an increased likelihood that new lows will be set as indicated by the rise in the two-year yield, and the widening of the inversion of the two-year and 10-year yield curve," said Sam Stovall, chief investment strategist at CFRA Research.

The S&P 500 is now around 3% away from its mid-June low, its weakest point of the year.

By 2:01 p.m. ET, the Dow Jones Industrial Average fell 26.8 points, or 0.09%, to 30,156.98, the S&P 500 lost 22.93 points, or 0.61%, to 3,767 and the Nasdaq Composite dropped 136.49 points, or 1.22%, to 11,083.70.

Recent dismal outlooks from companies including FedEx Corp (NYSE:FDX) and Ford Motor (NYSE:F) Co have also raised concerns about the health of corporate America.

Darden Restaurants Inc (NYSE:DRI) slid 3.9% after the Olive Garden parent reported downbeat first-quarter sales.

Major U.S. airlines - which have enjoyed a rebound amid increased travel as pandemic restrictions end - were also down, with United Airlines and American Airlines (NASDAQ:AAL) falling 4.9% and 4.3% respectively.

JetBlue Airways (NASDAQ:JBLU) Corp was down 6.2%, trading at levels last seen in March 2020.