All three major U.S. stock benchmarks closed sharply lower Tuesday, with losses led by the technology-laden Nasdaq Composite Index, as the high-growth tech sector fell under pressure from climbing Treasury yields and investors began digesting a busy week for company earnings.
A blockbuster tech deal was also in the spotlight, after Microsoft Corp. MSFT, -2.43% said it had reached an agreement to acquire Activision Blizzard Inc. ATVI, +25.88% in an all-cash deal valued at $68.7 billion.
What did stock indexes do?
The Dow Jones Industrial Average DJIA, -1.51% dropped 543.34 points, or 1.5%, to close at 35,368.47.
The S&P 500 SPX, -1.84% declined 85.74 points, or 1.8%, to end at 4,577.11.
The Nasdaq Composite COMP, -2.60% sank 386.86 points, or 2.6%, to finish at 14,506.90, below its 200-day moving average.
What drove markets?
Stocks dropped sharply as Treasury yields rose in anticipation of the Federal Reserve tightening monetary policy this year.
“We’re looking at a year of a totally different monetary environment,” said Sam Solem, portfolio manager for Intrepid Private Wealth, in a phone interview Tuesday. “Everyone is trying to digest what three to four Fed rate hikes look like this year.”
The yield on the 10-year Treasury note TMUBMUSD10Y, 1.876% rose 9.5 basis points Tuesday to 1.866%, the highest in about two years based on trading levels at 3 p.m. Eastern Time, according to Dow Jones Market Data. The yield on the 2-year Treasury note TMUBMUSD02Y, 1.046%, which is more sensitive to Fed policy expectations, shot up 7.3 basis points to 1.038% to reach the highest level since late February 2020.
Yield-sensitive tech and other growth stocks were weighing on the Nasdaq, but “it is not all doom and gloom out there, because M&A activity is going well, and the ongoing vaccination efforts by Western governments means the soft patch in U.S. and global data could be short-lived,” said Fawad Razaqzada, analyst at ThinkMarkets, in a note.
Information technology had the steepest decline among the S&P 500 index’s sectors Tuesday, according to FactSet data. Tech fell 2.5%, while the financial sector ended with the second biggest loss with a 2.3% slide.
Goldman Sachs Group Inc. GS, -6.97% on Tuesday said its fourth-quarter profit fell 13%, missing Wall Street estimates, in a choppy quarter for the Wall Street firm. Shares of Goldman closed about 7% lower, leading losses for the Dow.
In U.S. economic data, the New York Fed’s Empire State index of business conditions nosedived to -0.7 in January from 31.9 in the prior month, reflecting fresh strains from the omicron virus and ongoing supply-chain bottlenecks.
That’s a “big miss,” said Solem, and a “sign that growth is slowing.”
Crude-oil prices CL00, meanwhile, traded at their highest level since 2014 amid unrest in the Middle East after Houthi rebels in Yemen launched a drone attack on a key oil facility in Abu Dhabi. The United Arab Emirates is OPEC’s third-largest producer.
West Texas Intermediate crude for February delivery CLG22, +3.27% rose 1.9% Tuesday to settle at $85.43 a barrel, after gaining 6.2% last week.
“I expect energy prices to stay high and that should benefit energy equities this year,” Solem said. The S&P 500’s energy sector SP500EW.10, -0.25% ended 0.4% higher Tuesday while the index’s other 10 sectors were all down, FactSet data show.
The U.S. stock market has fallen lately “largely for reasons of psychology,” according to George Ball, chairman of Sanders Morris Harris.
“The market has been fully priced, or even overextended, for well over a year now,” said Ball, in a phone interview Tuesday. Investors are now adjusting the composition of the portfolios partly on “fear of a more aggressive Fed,” whether that proves “economically significant” or not.
“It’s not the impact of the Fed itself,” he said. “It’s the fear of what an investor thinks other investors will read into the tea leaves.”
Which companies were in focus?
In its biggest ever acquisition, Microsoft MSFT, -2.43% said it would pay $95 per Activision ATVI, +25.88% share to create the world’s third-biggest gaming company measured by revenue, behind Tencent and Sony. Microsoft shares fell 2.4%, while Activision surged 25.9%.
Other videogame companies also jumped, with Electronic Arts Inc. EA, +2.66% up 2.7% and Take-Two Interactive Software Inc. TTWO, +0.96% closing 1% higher.
Shares of Charles Schwab Corp. SCHW, -3.53% fell 3.5% after the online brokerage reported earnings and revenue that came in below Wall Street forecasts.
Shares of Plexus Corp. PLXS, -8.29% dropped 8.3% after the electronic manufacturing services company warned that it will miss fiscal first-quarter profit and revenue guidance provided in October because of “unanticipated” supply chain challenges that worsened in the finals weeks of the quarter.
How did other assets fare?
The ICE U.S. Dollar Index DXY, +0.51%, a measure of the currency against a basket of six major rivals, rose 0.5%.
Gold futures GC00, -0.17% GCG22, -0.17% edged 0.2% lower to settle at $1,812.40 an ounce.
The Stoxx Europe 600 SXXP, -0.97% closed 1% lower, while London’s FTSE 100 UKX, -0.63% fell 0.6%.
The Shanghai Composite SHCOMP, +0.80% rose 0.8%, while the Hang Seng Index HSI, -0.43% fell 0.4% in Hong Kong and the Nikkei 225 NIK, -0.27% declined 0.3%.
—Steve Goldstein contributed to this article.