U.S. stocks fell as concern over the outlook for corporate earnings weighed on risk sentiment while investors assessed the path for policy tightening. 

The S&P 500 closed in the red for the first time in five days after struggling for direction throughout the session. The Dow Jones Industrial Average dropped the most in a month, with financials weighing on the gauge of blue chips. Meanwhile, the tech-heavy Nasdaq 100 eked out gains, up for a seventh day, taking a cue from declines in policy sensitive short-dated Treasury yields.

Goldman Sachs Group Inc. slid the most in a year after reporting fourth-quarter net revenue below expectations, while Morgan Stanley rallied as its wealth-management business boosted revenue above forecasts. Travelers Cos. fell after reporting preliminary earnings. Pfizer Inc. retreated as Wells Fargo & Co. predicted earnings downgrades for the drugs company.

Earnings may set the tone for traders this week as the reporting season moves up a gear. Of the 33 S&P 500 companies that have posted results so far, 25 have beaten analysts’ expectations. While it’s still early days in the season, the nascent trend lags buoyant surprises of earlier quarters. UBS Wealth Management expects “quite a bit of downside here on the earnings” in the U.S., according to Hartmut Issel, head of Asia Pacific equities. 

“While we envision more choppiness in markets in the first quarter, we see markets settling into a slow grind higher after that,” wrote Art Hogan, chief market strategist at B. Riley Wealth. “The Fed will have reached its terminal Fed funds rate in 1Q, and investors can start reacting to incoming data without the lens of what better news will mean for Monetary Policy. Good news for the economy can become good news for markets.”

Goldman Sachs fell 6.4 per cent after it reported investment-banking fees tumbled by almost half during the last three months of 2022 and costs jumped. Travelers dropped after the insurer reported higher storm claims in the fourth quarter as part of preliminary earnings. Pfizer slid more than 3 per cent after Wells Fargo downgraded its recommendation on the stock. Morgan Stanley climbed 5.8 per cent.

Treasuries posted modest gains at the front end of the curve, with the policy sensitive two-year yield falling 3 basis points. European sovereigns also caught bids, with the 10-year bund yield dropping eight basis points. The drop in yields suggested traders are betting pressures on rate hikes are easing. 

The dollar traded near the lowest level since April and the euro fell. The yen gained ahead of a Bank of Japan policy decision.

Data today showed New York state manufacturing activity plummeted in January to the lowest level since the early months of the pandemic as new orders and shipments collapsed. The measure has shown contraction in five of the last six months, underscoring the depth of the pain to the manufacturing sector as the Federal Reserve hikes interest rates.

A New York Fed survey showed that spending growth may be slowing as interest rates rise but still remains elevated. 

More commentary

• “Earnings season gets into full swing this week and the focus will be on jobs, wages, inflation, and margins for companies reporting,” wrote Paul Nolte, senior wealth manager and market strategist at Murphy & Sylvest Wealth Management. “The expectation this year is for a modest decline in economic growth which should do little to dampen corporate profits. The next few weeks will be a good test of that thesis.”
• “As we saw in today’s earnings from GS and MS (we own both) the difference between good management and one that is behind is vast,” wrote Nancy Tengler, CEO & CIO of Laffer Tengler Investments. “However, we think GS kitchen-sinked it and warned, so this presents an interesting opportunity to buy shares,” .
• “While we agree that evidence is building that inflation has definitively turned down, we caution against exuberance around the ‘inflation is dead’ narrative,” Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management, said in a note. “We are still a long way from ‘mission accomplished.’”

Several Fed officials will be speaking this week, providing more clues on their policy priorities. The World Economic Forum’s annual meeting kicks off in Davos, Switzerland, with speakers including ECB President Christine Lagarde and the International Monetary Fund’s Kristalina Georgieva.

Elsewhere, oil contracts traded higher as traders looked to a revival in Chinese demand this year after data showed the economy fared better than expected last quarter.

Key events this week:

• Earnings to include: Charles Schwab, Discover Financial, Interactive Brokers, Investor AB, Netflix, Procter & Gamble, Prologis, State Street
• Fed’s John Williams to speak, Tuesday
• Euro-zone CPI, Wednesday
• U.S. retail sales, PPI, industrial production, business inventories, MBA mortgage applications, cross-border investment, Wednesday
• Bank of Japan rate decision, Wednesday
• Federal Reserve releases Beige Book, Wednesday
• Fed speakers include Raphael Bostic, Lorie Logan and Patrick Harker, Wednesday
• U.S. housing starts, initial jobless claims, Philadelphia Fed index, Thursday
• ECB account of its December policy meeting and President Christine Lagarde on a panel in Davos, Thursday
• Fed speakers include Susan Collins and John Williams, Thursday
• Japan CPI, Friday
• China loan prime rates, Friday
• U.S. existing home sales, Friday
• IMF’s Kristalina Georgieva and ECB’s Lagarde speak in Davos, Friday

Some of the main moves in markets:

Stocks

• The S&P 500 fell 0.2 per cent as of 4 p.m. New York time
• The Nasdaq 100 rose 0.1 per cent
• The Dow Jones Industrial Average fell 1.1 per cent
• The MSCI World index was little changed

Currencies

• The Bloomberg Dollar Spot Index fell 0.1 per cent
• The euro fell 0.3 per cent to US$1.0793
• The British pound rose 0.7 per cent to US$1.2279
• The Japanese yen rose 0.2 per cent to 128.27 per dollar

Cryptocurrencies

• Bitcoin rose 1.2 per cent to US$21,387.14
• Ether rose 0.5 per cent to US$1,586.93

Bonds

• The yield on 10-year Treasuries advanced four basis points to 3.54 per cent
• Germany’s 10-year yield declined eight basis points to 2.09 per cent
• Britain’s 10-year yield declined six basis points to 3.32 per cent

Commodities

• West Texas Intermediate crude rose 1.4 per cent to US$80.97 a barrel
• Gold futures fell 0.6 per cent to US$1,910.90 an ounce