Wall Street heads for biggest drop of 2023, with Dow down nearly 700 points

This is a breaking news update. An early AP report follows. NEW YORK (AP) — Wall Street tumbled on Tuesday, with stocks heading for their worst day in two months on worries about tightening pressure from rising interest rates and looming corporate profits. The S&P 500 was down 1.9% in afternoon trading, which would be the biggest drop since the market sell-off in December. The Dow Jones Industrial Average was down 650 points, or 1.9%, at 33,190 as of 3:00 p.m. ET, while the Nasdaq Composite was down 2.2%. Home Depot was among the market’s biggest losers after its financial forecast fell short of Wall Street expectations. It fell 6.3% despite reporting stronger-than-expected profits for the final three months of 2022. The retailer said it would spend $1 billion to increase wages for hourly workers in the US and Canada. That adds to broader concerns that rising costs for companies have been eating into profits, one of the main levers used to set share prices. Another major lever also looks shaky as rates continue to rise. When safe bonds pay higher interest, they can make stocks and other investments look less attractive. Why take a lot of risk on stocks if something safer pays off more? Higher interest rates also increase the risk of a recession because they slow the economy in hopes of curbing inflation. Interest rates and stock prices are so high that U.S. stocks look more expensive than at any time since 2007, according to strategists at Morgan Stanley. The yield on the 10-year U.S. Treasury note, which helps set rates on mortgages and other important lending, jumped further to 3.94% from 3.82% late Friday. The yield on the two-year Treasury note, which is heavily influenced by Fed expectations, rose to 4.72% from 4.62%. It was near its highest level since November. If it breaks that level, it will be at its highest level since 2007. “That’s the pressure on the market,” said Keith Lerner, chief market strategist at Truist Advisory Services. Yields rose this month as Wall Street raised its forecast for how high the Fed will raise short-term interest rates to curb inflation. soaring. The Fed has raised its key overnight interest rate to 4.50% to 4.75% from essentially zero early last year. There have been several recent reports on a stronger-than-expected economy. That allayed fears that the economy could soon be in recession, which was good news for markets. But on the negative side, they could also exacerbate upward pressure on inflation and give the Fed more reason to stick to the “long-term high interest rate” policy it has been supporting. The latest evidence came from a preliminary report on Tuesday that suggested business activity was gaining momentum. The services sector likely resumed growth last month and hit an eight-month high, according to S&P Global. Manufacturing, meanwhile, may still be contracting, but the data hit a four-month high. The strength has led more bearish investors on Wall Street to maintain their recession forecasts, but push their timing until later in the year. The Fed said in December that its typical policymaker expects short-term interest rates to rise to 5.1% by the end of the year, with the earliest rate cut occurring in 2024. Speaking of this after earlier thinking the Fed would end up with an easier rate policy than it is now, Wall Street has largely become more aligned with the Fed’s view. There is concern that the Fed may further increase its rate forecast when it releases its latest economic projections next month. In addition to a stronger-than-expected job market and retail sales, recent reports suggest that inflation has not cooled as quickly and smoothly as hoped. Those concerns stalled Wall Street’s strong rally early in the year. The S&P 500 is still up 4.3% so far this year after jumping 8.9% earlier. Another threat to markets is that the Fed may not cut rates as quickly in the past in the face of economic weakness, according to Truist’s Lerner. “This is the first time in over a decade that the Fed has had to worry about inflation,” he said. “What happened last year created scar tissue that could keep rates on longer.” “When we do get into a downturn, the Fed won’t be as aggressive as it has been. They might still be thinking about inflation.” While the job market and consumer spending have been resilient amid rising interest rates, some areas of the economy have shown more weakness. A report on Tuesday showed sales of existing homes slowed to their lowest level in more than a decade. In foreign stocks, shares were mostly lower after manufacturing indicators in Europe and Asia were mixed and Russian President Vladimir Putin accused the West of threatening Russia. ___ AP Business Writers Yuri Kageyama and Matt Ott contributed.