Wall Street Drifts Lower on Rate Worries

NEW YORK (AP) -- U.S. stocks are drifting Thursday, a day after tumbling on worries that interest rates may stay high for a while.

The S&P 500 was 0.3% lower in morning trading, coming off a slide of 0.9%. The Dow Jones Industrial Average was down 237 points, or 0.6%, as of 10:35 a.m. Eastern time, and the Nasdaq composite was 0.1% higher.

In the bond market, which has been driving much of Wall Street's action, Treasury yields were mixed and keeping up pressure on the stock market. They eased early in the morning and then recovered following a mixed batch of data on the U.S. economy and speculation about when the European Central Bank may cut interest rates. It held its main rate steady after a meeting in Germany.

When or whether the Federal Reserve will deliver the cuts to interest rates in the United States that traders are craving has been one of the main questions dominating Wall Street. After coming into the year forecasting at least six cuts to rates, traders have since drastically scaled back their expectations. A string of hotter - than - expected -reports on inflation and the economy has raised fears that last year's progress on inflation has stalled. Many traders are now expecting just two cuts in 2024, with some discussing the possibility of zero.

A report on Thursday morning showed inflation at the wholesale level was a touch lower last month than economists expected. That's encouraging, but it also showed underlying trends for inflation were closer to forecasts or just above. Those numbers strip out the effects of fuel and some other prices that are notoriously jumpy, and economists say they can give a better idea of where inflation is heading.

The update doesn't offset Wednesday's disappointingly high report on inflation at the U.S. consumer level, "but it may ease investor nerves, at least in the short term," said Chris Larkin, managing director, trading and investing, at E-Trade from Morgan Stanley.

A separate report said fewer U.S. workers applied for unemployment benefits last week. It's the latest signal that the job market remains remarkably solid despite high interest rates.

The growing worry is that stubbornly high inflation will tie the hands of the Federal Reserve, which had hinted it may cut rates three times during 2024. The Federal Reserve has been holding its main interest rate at the highest level since 2001 in hopes of grinding down enough on the economy and investments prices to get high inflation under control. The fear is that rates held too high for too long can cause a recession.

In fact, some investors are now warning that any cuts to rates by the Fed could be seen as a red flag more than anything. They may arrive only if the economy and job market are weakening enough to require an extra push for the economy.

All this is coming at a time when critics had already been calling the U.S. stock market too expensive following its leap of more than 20% since Halloween. For stock prices to look more reasonable, without requiring sharp drops, either interest rates would need to fall or corporate profits would need to strengthen.

Earnings reporting season is just underway, as companies tell investors how much they earned during the first three months of the year. Analysts are broadly expecting S&P 500 companies to report a third straight quarter of growth, according to FactSet.

The reasons for profit growth underneath the surface may be changing, according to Bank of America strategists. After earlier banking on cost cuts and other moves to wring more profit out of each $1 in revenue, the next leg of the earnings upcycle will be led by stronger sales, Ohsung Kwon and Savita Subramanian wrote in a BofA Global Research report.

Constellation Brands rose 2% for one of the bigger gains in the S&P 500 after it reported stronger profit than expected for the three months through February. It cited solid growth for its Modelo Especial beer brand. It also gave a forecast for earnings this upcoming fiscal year that topped Wall Street's expectations.

On the losing end was CarMax, which fell 12.7%. It reported weaker profit for its latest quarter than analysts expected. Higher interest rates on car loans are making the business tougher, along with tightened lending standards and low consumer confidence.

In the bond market, the yield on the 10-year Treasury rose to 4.58% from 4.55% late Wednesday. The two-year yield, which more closely tracks expectations for Fed action, edged down to 4.95% from 4.97%.

In stock markets abroad, indexes fell across Europe. Stocks were mixed in Asia, where South Korea's Kospi edged up by 0.1% after the ruling conservative party suffered a crushing defeat in a parliamentary election.