Stocks Drop as Bank Profits Tumble


U.S. stock indexes wobbled Tuesday, following sharply lower earnings from two of the biggest investment banks and Chinese data that showed a near-historic slowdown in economic growth.

The Dow Jones Industrial Average dropped 391.76 points, or 1.1%, to 33910.85, weighed down by declines in shares of Goldman Sachs Group and property-and-casualty insurer Travelers.

The broad-based S&P 500 index fell 8.12 points, or 0.2%, to 3990.97. The tech-focused Nasdaq Composite edged up 15.96 points, or 0.1%, to 11095.11, rising for seven consecutive trading days, its best stretch since November 2021.

U.S. stock and bond markets were closed Monday to observe Martin Luther King Jr. Day. 

Stocks have started the year strong, with investors positioning for easing inflation that could drive a shift in central-bank policy. The Federal Reserve aggressively raised interest rates in 2022 to tame inflation, rattling stocks and bonds alike.

The S&P 500 is up about 4% so far this year, and investors are looking for signs the rally can continue. 

“I’m pretty optimistic that we can continue to climb the wall of worry because everybody was so pessimistic,” said Sandy Villere, portfolio manager with Villere & Co. Mr. Villere recommended investors shift into growth stocks instead of defensive companies because he expects the Fed to stop raising interest rates soon. He’s buying shares of small-cap growth companies, he said.

In earnings-related news,

Goldman Sachs

and Morgan Stanley both noted sharply lower fourth-quarter profits, owing to a substantial slowdown in deal making.

After missing Wall Street’s earnings estimate, Goldman saw its shares finish the day down $24.08, or 6.4%, to $349.92—making the bank the biggest drag on the Dow. In contrast,

Morgan Stanley

stock rose $5.42, or 5.9%, to $97.08, after revenue and profit beat expectations.

Economists and financial analysts look at bank earnings to get a sense of the economy’s health. WSJ’s Telis Demos explains how inflation as well as recession concerns can be reflected in their results. Illustration: Lorie Hirose

A series of other large banks including

JPMorgan

reported Friday. Collectively, they have put aside billions of dollars in loan-loss provisions in anticipation of a recession. 

Some investors, however, aren’t convinced a deep recession is imminent. “The likelihood of a recession is lower than people are expecting,” said Jonathan Golub, a research analyst at Credit Suisse who noted that inflation is slowing, earnings are beating, wages are rising and consumer spending remains strong.

Although earnings season has just started, more than 70% of the companies that have reported have beat projections, according to analysis through Friday by Mr. Golub.

Mr. Golub recommended investors buy shares of smaller regional banks over big ones because the latter are more reliant on deal making and trading activity, which could suffer this year.

Among other movers, Travelers shares dropped $8.92, or 4.6%, to $185, after the insurer unveiled an unexpectedly large estimate for its costs from winter storms, leaving investors concerned about disappointments at other property insurers.

Silvergate Capital

shares inched up 13 cents, or 1%, to $13.33, paring a morning gain of nearly 30%. The crypto bank disclosed it lost nearly two-thirds of its asset value in the quarter.

Shares of

Roblox

jumped $3.91, or 12%, to $37.12, after the company—which operates a metaverse-like realm, or a virtual place where people play and make transactions—reported December metrics that showed a reacceleration in daily active users.

U.S. indexes have gained to start 2023, with the S&P 500 up by more than 4% this year as of Friday’s close.



Photo:

Michael M. Santiago/Getty Images

The yield on the benchmark 10-year Treasury note was 3.534% versus 3.510% Friday as the recent rally in bond prices stalled. Yields rise when prices fall. 

Among riskier assets, bitcoin prices stabilized above the $20,000 mark for the first time since the collapse of crypto exchange FTX. The cryptocurrency is still off about 70% from its record high in late 2021.

Chinese stock indexes declined, as Beijing reported that annual economic growth slowed to 3% last year, one of the slowest growth rates in decades last year. Its shrinking population also remains a source of worry for investors. The shift marks a watershed moment in China’s history with profound implications for its economy and its status as the world’s factory floor.

In recent weeks, China’s reopening after three years of lockdowns has been a boost to global markets, which have been outperforming U.S. stocks. Eric Theoret, global macro strategist at Manulife Investment Management, said his firm has increased allocation to emerging markets since late last year.

Hong Kong’s Hang Seng Index fell 0.8%, and the Shanghai Composite Index inched down 0.1%. 

In Japan, the Nikkei 225 rose 1.2%, as the

Bank of Japan

began its two-day monetary policy meeting. This meeting is being closely watched by investors in the wake of a surprise tweak to the central bank’s yield-curve control policy last month. The yield on the country’s 10-year government bond rose above the Bank of Japan’s 0.5% cap again on Tuesday. 

The pan-continental Stoxx Europe 600 rose 0.4%.

Write to Anna Hirtenstein at anna.hirtenstein@wsj.com and Hardika Singh at hardika.singh@wsj.com

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