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Dow Jones runs out of steam

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2023-07-28

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The Dow Jones Industrial Average finally ran out of steam on Thursday as investors took their profits, ending 13 straight days of gains.

If it had gained a 14th day on Thursday, the Dow would have tied its record-winning 14-day streak going way back to 1897.

The index fell 237.40 points, or 0.67%, to 35,282.72 — dragged lower by shares of Honeywell, a pop in the yield on US Treasury bonds back over 4%, and investors' desire for safety after the Dow’s record run.

The S&P 500 also fell, losing 0.64% to 4,537.41. During the session, the broader index topped the key 4,600 level for the first time since March 2022. The Nasdaq also saw a slide, down 0.55% to 14,050.11, as investors took profits in key tech stocks like Microsoft and Apple.

The Dow’s winning streak had been driven by rising signs that the economy would avoid a recession, falling inflation data, and resilient corporate earnings.

Thursday saw more evidence on all these fronts. Shares in Meta rose more than 4% on its solid June quarterly report, and the first reading of June quarter GDP at 2.4% surprised on the upside, exceeding forecasts for a 2% rise. The underlying inflation in the data showed a sharp slide to 2.6% from 4.1% in the three months to March.

Wednesday’s rate rise from the US Federal Reserve didn’t stop the Dow’s charge higher, but Thursday’s data did, contrary to expectations of further gains.

Data on the current earnings season was encouraging.

The second-quarter earnings season is nearly halfway through, and according to data group Refinitiv, 44% of S&P 500 companies have reported results, which is 219 companies.

On the earnings front, 78% of companies have topped expectations, while 62% have beaten revenue estimates. However, the energy sector is expected to see the biggest decline in earnings year over year (as we saw with weak results from Shell and TotalEnergies on Thursday).

Earnings are expected to fall 6.8% from a year ago, with revenues expected to be down 0.6%, according to the blended growth rate and Refinitiv data.

Economists said the strong first reading of June quarter GDP could be seen as a sign that the Fed can keep lifting rates, though the report also showed softening prices that support the recent drop in inflation.

Following the Fed's move, the European Central Bank also raised its rates by 0.25% to 4.25%, a joint high going back to the early years of the millennium.

The ECB president, Christine Lagarde, left the door open for further rate rises after stating that the governing board would be “data dependent” about its next steps, similar to the stance adopted by the Fed.

Eurozone inflation has fallen from 10.6% last year to 5.5% in June, echoing the slide in US consumer price inflation from the peak of 9.1% in June last year to 2.97% in June this year.

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