U.S. stocks dropped the most in two months and Treasury yields retreated after First Republic Bank’s disappointing earnings and potential assets sale rekindled worries that the banking crisis has not run its course.

The S&P 500 lost 1.6 per cent in afternoon trading, with First Republic’s 49 per cent plunge taking the lender’s shares to a record low. Bloomberg News reported the troubled bank, which saw greater-than-expected withdrawals in the first quarter, is exploring divesting up to US$100 billion of long-dated mortgages and securities as part of a broader rescue plan. 

Meanwhile, the two-year Treasury yield tumbled to 3.92 per cent as investors sought the safety of U.S. government debt.

“The First Republic earnings call was a disaster and has re-triggered risk-off impulses,” said Win Thin, global head of currency strategy at Brown Brothers Harriman.

The Federal Reserve is still expected to raise interest rates by a quarter percentage point when it meets next week, though signs are mounting that the American economy is starting to sputter after a year of aggressive tightening. Data Tuesday showed consumer confidence slipped, while two regional Fed manufacturing reports underwhelmed.

Investors are also scrutinizing a slew of corporate earnings for clues on the state of the economy. UBS Group AG slid after results fell short while General Motors Co. and PepsiCo Inc. beat expectations.

Among other U.S. companies reporting earnings Tuesday:

• Spotify Technology SA rose 5.1 per cent after adding subscribers
• 3M Co. was little changed after announcing a restructuring push
• General Electric Co. declined 1.7 per cent after raising forecasts
• McDonald’s Corp. was little changed after beating sales estimates
• Danaher Corp. dropped 8.7 per cent after lowering full-year guidance

“The sugar high from the Covid stimulus has ended. Now companies are having to contend with a more challenging economic environment following a big batch of Fed rate hikes,” Kelly Bogdanova, vice president and portfolio analyst at RBC Wealth Management, said in an interview. “From our perspective, we’re staring an earnings recession in the face.”

The market is now pricing a peak for U.S. interest rates in June, followed by a cut to below 4.5 per cent by year end. The 10-year Treasury yield continued its slide to 3.39 per cent — dipping well below its 200-day moving average.

“Investors need to spend a little more time using common sense … and adjust their portfolios to the reality that a soft landing in the economy this year is a pipe dream,” wrote Matt Maley, chief market strategist at Miller Tabak + Co, in a morning note.

There’s a growing consensus a recession is near, especially with signs of a credit crunch in results from First Republic and UBS, Maley said. “When was the last time a material contraction in credit did not result in a recession? The answer: Never!” he wrote. 

A Bloomberg gauge of the dollar climbed. The Stoxx Europe 600 index dropped 0.4 per cent. Oil fell, gold was little changed, iron ore extended a losing streak to a fifth day, and Bitcoin slid for a third day.

Key events this week:

• Australia CPI, Wednesday
• Sweden rate decision, Wednesday
• Eurozone economic, consumer confidence, Thursday
• U.S. initial jobless claims, GDP, Thursday
• Bank of Japan meets on interest rates, Friday
• Euro-area GDP, Friday
• U.S. personal income, Friday

Earnings highlights:

• Wednesday: Boeing, Meta, Hilton
• Thursday: Amazon, American Airlines, Intel, Mastercard, Southwest Airlines, Hershey, Honeywell, Barclays

Some of the main moves in markets:

Stocks

• The S&P 500 fell 1.6 per cent as of 4 p.m. New York time
• The Nasdaq 100 fell 1.9 per cent
• The Dow Jones Industrial Average fell 1 per cent
• The MSCI World index was little changed

Currencies

• The Bloomberg Dollar Spot Index rose 0.4 per cent
• The euro fell 0.7 per cent to US$1.0970
• The British pound fell 0.7 per cent to US$1.2403
• The Japanese yen rose 0.5 per cent to 133.51 per dollar

Cryptocurrencies

• Bitcoin rose 0.6 per cent to US$27,626.28
• Ether fell 0.1 per cent to US$1,837.86

Bonds

• The yield on 10-year Treasuries declined 11 basis points to 3.38 per cent
• Germany’s 10-year yield declined 12 basis points to 2.38 per cent
• Britain’s 10-year yield declined nine basis points to 3.69 per cent

Commodities

• West Texas Intermediate crude fell 2.2 per cent to US$77.05 a barrel
• Gold futures rose 0.5 per cent to US$2,009.20 an ounce