US stocks suffer biggest rout in almost 2 years as falling profits reignite inflation fears

Traders work on the floor of the New York Stock Exchange. PHOTO: AFP

NEW YORK (REUTERS, AFP) – A short reprieve for investors ended abruptly on Wednesday (May 18) as US stocks suffered their steepest rout in almost two years after shrinking profits by major American retailers reignited fears of high inflation.

On Wall Street, the Dow Jones Industrial Average fell 3.56 per cent, the S&P 500 lost 4.03 per cent and the Nasdaq Composite dropped 4.73 per cent.

The declines for the S&P 500 and Dow marked their biggest one-day percentage declines since June 11, 2020.

The mood was underscored by a 9 per cent surge in UK consumer prices and a faster-than-expected acceleration in inflation in Canada. British inflation surged to its highest annual rate since 1982 as energy bills soared, while Canadian inflation rose to 6.8 per cent last month, largely driven by rising food and shelter prices.

Triggering the US sell-off were earnings results from retailer Target Corp, whose quarterly profit halved as it warned of a bigger margin hit this year due to rising fuel and freight costs. It also lowered its forecast for the year.

Target shares plummeted 24.88 per cent, its biggest one-day percentage drop since the “Black Monday” stock market crash on Oct 19, 1987, a day after bigger rival Walmart warned of similar margin squeezes and saw its stock drop 11.4 per cent for its biggest one-day percentage fall since Oct 16, 1987.

“It was Walmart yesterday and everybody thought it was a one-off,” said Dennis Dick, head of markets structure and a proprietary trader at Bright Trading. “Now that Target misses earning a lot more than Walmart even did, they’re scared that consumer is not as strong as everybody think it is.”

Earnings at Target “collapsed” in the quarter, said Neil Saunders, analyst at GlobalData.

“One of the factors behind the profit decline is a shift away from discretionary to non-discretionary categories like food and household goods,” Mr Saunders said in a note. “The latter are lower margin and this change in the sales mix negatively impacts profits.”

The weak results come in a market already buffeted by recession fears as the Federal Reserve raises interest rates to counter inflation.

MSCI’s gauge of stocks across the globe shed 2.74 per cent on Wednesday, while in Europe, the pan-regional STOXX 600 index closed down 1.14 per cent.

Few analysts are willing to predict the end to selling after a bruising first five months of the year for risk assets given the magnitude of macroeconomic uncertainty, with many anticipating market volatility will be the norm for some time.

The US dollar gained ground as the sell-off in risk assets boosted the safe-haven appeal of the greenback, which was on pace to snap a three-session losing streak, a day after Fed Chair Jerome Powell pledged the US central bank would ratchet up rates as high as needed to combat rising inflation.

The dollar index rose 0.581 per cent, with the euro down 0.8 per cent to US$1.0463. The Japanese yen strengthened 0.92 per cent to 128.23 per dollar.

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