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Markets Drop As Investors Brace For Shaky Earnings Season, Looming Inflation Report

Topline

Stocks fell on Monday as markets brace for the start of earnings season—with several major companies reporting quarterly results this week, as investors also remain nervous about the upcoming June inflation report and what it could mean for the economy.

Key Facts

Markets moved lower: The Dow Jones Industrial Average fell 0.5%, nearly 200 points, the S&P 500 1.1% and the tech-heavy Nasdaq Composite 2%.

Stocks are coming off of a rare winning week after a better-than-expected jobs report on Friday, though some experts believe the strong labor market will embolden the Federal Reserve to continue hiking rates aggressively as it looks to bring down inflation.

Recession fears continued to weigh on stocks, especially as the yield curve remains inverted: The two-year Treasury yield traded at roughly 3.08% on Monday, staying slightly higher than the ten-year rate.

Markets also took a hit from negative Covid headlines out of China: Case numbers are rising—with Shanghai reporting its first case of the BA.5 subvariant, while Macau closed its casinos for the week.

Oil prices fell slightly thanks to the renewed Covid fears in China, with U.S. benchmark West Texas Intermediate trading at $104 per barrel, while international benchmark Brent crude is up to more than $106 per barrel.

Shares of Twitter, meanwhile, fell roughly 5% after Tesla billionaire Elon Musk said he is “terminating” his $44 billion deal to buy the social media company, even as the platform prepares to take legal action to enforce the merger agreement.

Crucial Quote:

“Stocks are kicking off the week for sale,” as “there’s trepidation ahead of earnings,” says Vital Knowledge founder Adam Crisafulli. Investors remain especially “nervous” about a hot consumer price index report due on Wednesday, with experts predicting inflation will surge higher than the 8.6% level reached in May.

What To Watch For:

Investors are bracing for a big week of earnings. Several notable companies are reporting quarterly results in the next few days, including PepsiCo on Tuesday and Delta Air Lines on Wednesday. Major Wall Street banks are all set to report at the end of the week, which should give investors additional clues about the health of the economy. “Given the economy’s quick pivot from stellar growth late last year to the real possibility that we are currently in a mild recession means this earnings season will be watched very closely,” says Lindsey Bell, chief markets & money Strategist for Ally. “There’s been a rallying cry on Wall Street for earnings estimates to be reduced in a significant way to reflect the current operating environment and to match the first half price performance of the stock market.”

Surprising Fact:

Wall Street’s preferred fear gauge—the CBOE Volatility Index (VIX)—jumped over 7% as market volatility surged on Monday.

Further Reading:

Stocks Fall After U.S. Economy Adds Back 372,000 Jobs In June (Forbes)

Elon Musk ‘Terminating’ Deal To Buy Twitter—Platform Plans Legal Action (Forbes)

Federal Reserve Prepares More Big Rate Hikes Amid Risk That High Inflation Could ‘Become Entrenched’ (Forbes)

Oil Falls Below $100 Per Barrel For First Time Since May As ‘Strong Likelihood Of Recession’ Hurts Demand (Forbes)

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