S&P 500 Notches a Second Week in the Red Amid Sticky Inflation, Weak Bank Earnings and Geopolitical Tensions

U.S. stocks plunged on Friday as the results of major U.S. banks fell short of expectations. This ended a week characterized by impactful inflation data with a higher-than-expected CPI shifting anticipations for Federal Reserve's policy. Fed officials stated on Thursday that there was no urgency to ease, with Boston Fed President Susan Collins emphasizing that the robustness of the economy and irregular reduction in inflation argued against an immediate initiative to reduce rates. As a result, traders pared back bets of an imminent Fed easing cycle. Money markets are now pricing in around two rate cuts this year, down from three a few weeks ago.

Geopolitical tensions also weighed on stock markets. President Joe Biden had predicted that Iran would carry out strikes against multiple targets inside Israel soon. That's what happened on Saturday night. Iran launched an unprecedented attack on Israel, marking a perilous shift in the rapidly escalating Middle East crisis even if "99%" of the 300 projectiles fired by Iran were intercepted by Israel's aerial defense systems and its "partners," according to the Israeli military.

Against this backdrop, the three major U.S. stock indices recorded losses over the week.

The S&P 500 index slid 1.56% while the Dow Jones Industrial Average dropped 920 points or 2.37%, continuing the second quarter's weak start. The Nasdaq limited its losses with a decrease of only 0.45% as tech stocks held up.

In Europe, the MSCI EMU was down 0.94% while the FTSE gained 1.07%.

Japan was the only real bright spot around the Asia Pacific this week, with the Nikkei 225 up 1.36% after two weeks in the red. The worst losses came from China, with the Shanghai Composite down 1.62%. South Korea's KOSPI slipped 1.19% while Singapore's STI and India's Nifty were flat.

The dollar index, which measures the U.S. currency against the yen, euro and four other peers, traded above 106, its highest since November 2023. It jumped 1.66% week-over-week, supported by the climb in Treasury yields. The U.S. 10-year Treasury yield gained 14 basis points from 4.38% to 4.52%. This is an increase of 64 basis points since the beginning of the year.

Gold futures surged again for the third week in a row, up 1.22%. Continuous safe-haven demand enabled the yellow metal to disregard a rise in the greenback after signs of U.S. economic vitality dampened early hopes for rate cuts.

All S&P Sectors in Negative Territory  

All 11 major sectors in the S&P 500 closed the week in negative territory for the first time since September 2023. Financials were the main detractors (down 3.60% for the week) as banks kicked off the earnings reporting season on the wrong foot. JPMorgan Chase & Co (JPM), the largest U.S. bank in terms of assets, reported a profit increase of 6%. However, its net interest income forecast did not meet expectations, causing its shares to tumble by 7.42% over the week. Shares of Wells Fargo & Co (WLC) fell 1.62% after reporting a 7% drop in profits following a decline in net interest income caused by poor borrowing demand. Citigroup experienced a loss following expenses on employee termination and deposit insurance, leading to a 3.12% drop in its stock.

Interest-sensitive sectors were hurt again by rising Treasury yields. Real estate was the most affected sector and the worst performer over the week, down 3.06%, and for the year (-7.20% year-to-date). There are also structural reasons that explain this decline. The rise in remote work popularity has left many office buildings vacant and raised worries about property loans.

The materials sector, which has one of the lowest percentages of analyst buy ratings, also took a nosedive with a loss of 3.10% for the week. The healthcare sector continued to brace for more tough times (down 3.12%) in the wake of the U.S. government's final decision on the 2025 rates for Medicare Advantage payments.

Only a few tech stocks rose in this sea of red. Apple stocks (AAPL) gained 4.11%. Alphabet stocks (GOOG) added 3.41%. As a result, the information technology sector and the communication services sector managed to weather the storm with moderate weekly losses of 0.22% and 0.50% respectively.

Please note this article is for information purposes only and does not in any way constitute investment advice. It is essential that you seek advice from a registered financial professional prior to making any investment decision.