US stocks drop after retailer Target warns of hit to margins

Wall Street stocks fell on Wednesday as a bounce for global equity markets faded and downbeat earnings from discount retailer Target intensified jitters about inflation and choked-up supply chains.

The benchmark S&P 500 share index dropped 1.5 per cent in early dealings and the technology-heavy Nasdaq Composite lost 1.8 per cent.

Shares in Target plunged 25 per cent after the retailer warned of lower profit margins, reporting higher freight, wage and fuel costs and disrupted logistics. This came a day after Walmart, the world’s largest bricks-and-mortar retailer, cut its earnings guidance, revealing it had also been wrongfooted by broad inflationary trends.

“The mood in the markets will focus more on margins becoming depressed and on earnings downgrades,” said Nadège Dufossé, head of cross-asset strategy at fund manager Candriam.

“There’s a beginning of a deterioration in the [economic] growth story, said Michael Metcalfe, head of macro strategy at State Street Global Markets. “And it’s started to get picked up in [corporate] earnings.”

Target’s share-price fall put it on track for its worst daily decline since 1987, a gloomy milestone also reached by Walmart in the previous session. Walmart slipped further on Wednesday, along with other consumer-focused companies including Dollar Tree and Best Buy.

The S&P had climbed 2 per cent on Tuesday, in a shortlived rebound after the worst streak of weekly losses for global equities since 2008.

Analysts cautioned that this was a bear market rally, where downtrends in equity markets are punctuated by short bursts of relief, as investors remained nervous about rising interest rates compounding a global economic slowdown.

The S&P, which leads other global stock markets, last week skirted a bear market, defined as a 20 per cent decline from a recent peak.

The dour mood in markets has developed as leading central banks, which pinned borrowing costs close to zero and bought government bonds at unprecedented rates at the start of the coronavirus pandemic, reverse their supportive policies. The Federal Reserve has raised interest rates by 0.75 of a percentage point since March and signalled further sharp increases on the horizon.

“Stock market weakness has mainly been driven by tighter financial conditions, but what has not yet been priced in is the potential for a moderation in growth and, accordingly, earnings,” said Candice Bangsund, portfolio manager at Fiera Capital.

“We’ve been of the view for some time that earnings expectations are overly optimistic given the inflationary environment, which is likely to squeeze profit margins.”

Elsewhere in equities, Europe’s regional Stoxx 600 share index fell 0.9 per cent. Hong Kong’s Hang Seng index added 0.2 per cent, while Tokyo’s Nikkei 225 closed 0.9 per cent higher.

In currencies, sterling fell 0.6 per cent against the dollar to $1.24 after data showed UK inflation hit a four-decade high of 9 per cent in April, increasing worries about the weakness of the economy.

Brent crude, the oil benchmark, rose 0.5 per cent to $112.5 a barrel.

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