US stocks fall as market mulls Fed's next move

Traders work the floor of the New York Stock Exchange on July 31, 2014 in New York City. US stocks finished sharply lower after a news-packed week that bolstered confidence in the economy even as speculation grew that the Federal Reserve will more qu
Traders work the floor of the New York Stock Exchange on July 31, 2014 in New York City. US stocks finished sharply lower after a news-packed week that bolstered confidence in the economy even as speculation grew that the Federal Reserve will more quickly raise interest rates. -- PHOTO: AFP 

NEW YORK (AFP) - US stocks finished sharply lower after a news-packed week that bolstered confidence in the economy even as speculation grew that the Federal Reserve will more quickly raise interest rates.

The Dow Jones Industrial Average sank 467.20 points (2.75 per cent) to 16,493.37, its deepest weekly decline since January.

The broad-based S&P 500 tumbled 53.19 (2.69 per cent) to 1,925.15, while the tech-rich Nasdaq Composite Index lost 96.92 (2.18 per cent) at 4,352.64.

The market's most dramatic day came on Thursday, when the Dow lost more than 300 points and gave up all its gains for 2014.

Analysts Thursday attributed the rout to a variety of factors including weak eurozone data, disappointing earnings and the Argentine debt default.

But on Friday, some analysts saw Thursday's losses and the sudden rise in volatility this week as having one catalyst above all others: worries over the timing when the US Federal Reserve will raise interest rates.

"It's the Fed because the market has been propelled by low rates," said Sam Stovall, chief investment strategist for S&P Capital IQ. "So now the question is how much of that propulsion will be cut back?"

- Signs of strength -

The Fed itself stuck to its dovish stance concluding a two-day monetary policy meeting Wednesday by keeping benchmark interest rates low for the foreseeable future.

A Fed statement highlighted continued concerns about the labour market event as it dropped its previous expression of concern about low inflation.

Stovall and other analysts saw signs this week of increased economic strengthening that could accelerate the Fed's time frame for hiking benchmark rates, which had been anticipated in the middle of 2015.

Strong data points included a Commerce Department estimate that US economic growth was 4.0 percent in the second quarter; a July jobs report that kept alive a US economic streak of adding at least 200,000 jobs per month since February; and a report by the Conference Board that showed US consumer confidence in June hitting the highest level since October 2007.

"The Fed is in play," a Nomura note said on Friday. "We are entering a new phase" where markets begin focusing on when and how fast rates rise, with implications for bond prices and the dollar, Nomura said.

The week's earnings reports lent further confidence to the sense the economy is improving, Mr Stovall said.

A week ago, analysts estimated that S&P 500 companies would report 8.3 per cent higher earnings in the second quarter. But by Friday, following reports from 150 more companies, analysts projected earnings growth of 9.6 per cent, according to S&P Capital IQ.

"Earnings are improving, economic growth is improving," Mr Stovall said. "The real question is what kind of effect that will have on inflation and as a result what kind of response will the Fed have in terms of raising the rates more quickly." Standout earnings this week came from Twitter, which surged 15.6 per cent on the week after revenues more than doubled on a 24 per cent rise in active users, and Dow component Procter & Gamble, which notched a 38 per cent rise in quarterly earnings to US$2.6 billion as it unveiled a plan to cut 90-100 underperforming brands.

P&G shares rose 3.0 per cent Friday after the announcement.

Disappointments included ExxonMobil (-4.2 per cent for the week), which reported a 5.7 per cent drop in oil and gas earnings, even as quarterly profits grew 28 per cent to US$8.8 billion.

Next week's calendar has major earnings reports from AIG, the Walt Disney Company, Time Warner and others.

Economic reports include data on the US trade deficit for June and the Institute for Supply Management's index of service sector business activity for July.