Wall Street Drops on Bank, Economy Worries

NEW YORK (AP) -- Stocks are tumbling Tuesday as worries about the banking system and the global economy inject more caution into financial markets worldwide.

The S&P 500 was 1% lower in morning trading and on track for its fifth loss in the last six days. The Dow Jones Industrial Average was down 431 points, or 1.2%, at 35,041, as of 10:30 a.m. Eastern time, and the Nasdaq composite was 1.2% lower.

In the U.S., bank stocks helped lead the market lower after Moody's cut the credit ratings for 10 smaller and midsized ones. It cited a list of concerns about their financial strength, from the effects of higher interest rates to the work-from-home trend that's leaving office buildings vacant.

Across the Pacific, stocks sank after a report showed exports for China's troubled economy shrank by the most since the start of the pandemic in 2020. And in Europe, bank stocks tumbled in Italy after its Cabinet approved a proposal to tax a chunk of their profits this year.

The worries layered on top of a mixed set of earnings reports from big U.S. companies.

UPS fell 1% after it cut its forecast for revenue this year. The company, which just reached a labor deal with 340,000 of its unionized workers, reported stronger profit for the spring but weaker revenue.

Among the relatively few winners on Wall Street was Eli Lilly, which jumped 17.2%. The medicine developer reported profit and revenue for the spring that both topped analysts' expectations.

Treasury yields tumbled in the bond market after investors herded into investments that are considered safer. It's a cooldown from the steep climb yields have been on recently, which has pressured the stock market.

The Federal Reserve has hiked its main interest rate to the highest level in more than two decades in hopes of grinding down inflation. High rates work by slowing the entire economy bluntly, which has raised the risk of a recession but also helped inflation to moderate since its peak last summer.

The much higher rates have hit banks particularly hard.

While downgrading credit ratings for 10 banks and putting six others under review, Moody's said the rapid rise in rates has led to conditions that hurt profits for the broad industry. Higher rates also knock down the value of investments made when rates were super low. Such conditions helped cause three high-profile failures for three U.S. banks earlier in the spring, which shook confidence in the system.

Moody's also said troubles may be coming for banks with lots of commercial real estate loans, which are threatened as work-from-home trends keep people out of offices.

"This comes as a mild U.S. recession is on the horizon for early 2024 and asset quality looks set to decline from solid but unsustainable levels," Moody's Jill Cetina and Ana Arsov wrote in a report.

M&T Bank, one of the banks whose credit rating they downgraded, fell 3.6%. Truist Financial, one of the banks that Moody's said it's reviewing for a possible downgrade, fell 4.1%.

Other, larger banks whose credit ratings weren't affected also sank. JPMorgan Chase fell 2.4% and was one of the heavier weights on the S&P 500.

Later this week, the U.S. government will releases data on consumer and wholesale inflation, which could influence what the Federal Reserve does next with interest rates.

The hope on Wall Street is that the cooldown in inflation since it topped 9% last summer will help persuade the Fed that no more rate hikes are needed. Forecasters expect Thursday's data to show consumer prices rose by 3.3% in July over a year ago, an acceleration from June's 3%.

But some economists and investors say getting inflation down that last bit to the Fed's target of 2% is likely to be the most difficult. They're saying Wall Street has become convinced too quickly that the Fed can achieve a "soft landing" for the economy and that the 19.5% run for the S&:P 500 through the first seven months of this year was overdone.

In the bond market, the yield on the 10-year Treasury fell to 3.99% from 4.10% late Monday. It helps set rates for mortgages and other loans.

The two-year Treasury yield, which more closely tracks expectations for the Fed, fell to 4.74% from 4.79%.

In Asia, stocks fell 1.8% in Hong Kong and 0.3% in Shanghai following the disappointing Chinese export data. The world's second-largest economy was supposed to be a bulwark for the rest of the world after it removed anti-COVID restrictions. But it's since stumbled, removing a big growth engine.