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US stocks fall on fears of slowing growth

Investors dumped stocks on Tuesday and bet on less aggressive policy from the Federal Reserve, after comments from social media group Snap and disappointing economic data fanned fears that growth in the US was poised to slow.

The Nasdaq Composite, which is weighted towards big US tech companies, fell 2.3 per cent on Tuesday. The more evenly balanced S&P 500, which tracks the fortunes of the largest publicly traded companies, declined 0.8 per cent. By the closing bell, however, both indices had eased off lows plumbed early in the session.

US stocks have been hard hit this year, with the average stock in the broad-based Russell 3000 down more than 40 per cent from recent highs, as the Fed has interest raised rates in its bid to tamp down inflation. Recent data pointing to slower growth has added to the pressure on stocks, as investors warn the US economic recovery following the coronavirus pandemic could be waning.

Money managers have instead hoovered up US government debt as they have swapped riskier investments for safe havens. The 10-year Treasury yield, which moves with economic growth and interest rate expectations, fell 0.09 percentage points to 2.76 per cent, its biggest one-day rally in price since late April.

Investors’ nerves were rattled after Snap said late on Monday that the “macroeconomic environment has deteriorated further and faster than anticipated” since it issued guidance in April. The group said its sales and profits for the current quarter would come in below its previous expectations. Snap shares fell 43 per cent on Tuesday.

Line chart of month-to-date performance (%) showing US stocks fall as earnings and economic data disappoint

Specifically, Snap cited the challenges posed by higher inflation, elevated interest rates, supply chain snafus, and the war in Ukraine among other things. Snap’s release had a particularly pronounced effect on its stock price and the market more broadly because its publication was unscheduled.

“Certainly, the stark warning of ‘macro deterioration’ from a social media company overnight, just a month after issuing quarterly guidance, presses all the relevant ‘leading indicator’ buttons,” wrote Citi strategist Edward Acton.

The sell-off in Snap sent Google parent Alphabet down 5 per cent on Tuesday, while Facebook owner Meta slid 8 per cent. The Nasdaq is now down 28 per cent this year.

The downbeat updates came after US consumer bellwethers Target and Walmart issued similarly grim outlooks last week.

Weak economic data on Tuesday also contributed to the bleak outlook. The US Census Bureau reported that new home sales fell by nearly 17 per cent in April, even as the supply of new homes for sale rose. The data “clearly points to a housing market that has turned”, said Doug Duncan, chief economist at Fannie Mae.

And S&P purchasing managers’ index data showed that business activity in the US and UK slowed in May.

Line chart of Citi's US economic surprise index showing US economic data falls short of Wall Street forecasts

Traders also wagered that these economic headwinds may mean the Fed will be less aggressive in its interest rate raises than was expected earlier this year. The two-year yield, which moves with interest rate expectations, dropped 0.14 percentage points to 2.49 per cent.

“The Fed wants to slow the economy down. The economy is slowing down,” said Andrew Brenner, head of international fixed income at NatAlliance Securities. “The Fed may pull something off without raising rates as much as they might have expected.”

European and Asian data provided further fodder to investors’ worries.

German businesses were “hiking their charges for goods and services to offset the higher cost of energy, fuel, raw materials and personnel”, according to a report accompanying S&P Global’s May flash purchasing managers’ index for the dominant eurozone economy.

Japanese manufacturing activity is also expanding at its slowest pace in three months, according to an equivalent PMI survey for the Asian nation, which its compilers blamed on “supply chain disruptions” from “economic sanctions placed on Russia” and lockdown measures across China.

Europe’s regional Stoxx 600 share index, which has lost more than a tenth so far this year, fell 1.1 per cent. Hong Kong’s Hang Seng share index closed 1.8 per cent lower and the Nikkei in Tokyo lost 0.9 per cent.