Dow snaps its longest winning streak since 1987 as strong second-quarter GDP data rattles investors hoping for rate cuts

What drove markets

U.S. stocks initially benefited from the latest batch of strong earnings reports and economic data on Thursday morning. However, the three major stock indexes reversed early gains to end lower in afternoon trading as bond yields jumped and after a news report said the Bank of Japan will discuss tweaking its yield-curve control policy at a policy board meeting Friday.

The BOJ potentially may let long-term interest rates rise beyond its cap of 0.5%, by a certain degree, according to the report.

The yield on the 2-year Treasury TMUBMUSD02Y, 4.899%, which is more sensitive to imminent central banks’ move, rose 11.4 basis points to 4.939% from 4.83% on Wednesday, while the yield on the 10-year Treasury  TMUBMUSD10Y, 3.978% soared 16.1 basis points to 4.011%, according to Dow Jones Market data.

The Bank of Japan began implemented yield-curve control, or YCC, in 2016, a policy that aims to keep government bond yields low, while ensuring an upward sloping yield curve. Under the policy control, the BOJ buys whatever amount of Japanese government bonds they think is necessary to ensure the 10-year yield remains below 0.5%.

However, rising inflation and interest-rate hikes by other major central banks around the world, including the Federal Reserve and the European Central Bank, are fueling concern that Japanese yields could climb past the 0.5% threshold.

Quincy Krosby, chief global strategist for LPL Financial, told MarketWatch in a phone interview that currency markets were rattled by the news report indicating the BOJ may tweak its policy.

The yen strengthened on Thursday afternoon. The U.S. dollar was off 0.6% versus the currency, fetching 139.46 yen USDJPY, 0.14%, according to FactSet data.

Meanwhile, Krosby pointed out it doesn’t take very much to cause a selloff or a correction in “an already overbought” U.S. stock market.

Shares of Honeywell International Inc. HON, -5.69% tumbled after the company reported second-quarter earnings that exceeded Wall Street expectations, but markets were disappointed as revenue that came up a bit shy as continued strength in aerospace was offset by weakness in safety and productivity. Shares finished 5.7% lower on Thursday, which also dragged down the blue-chip gauge, said Krosby.

Earlier in the session, an earnings beat by Meta Platforms META, +4.40%, the owner of Facebook and Instagram, helped catapult the Nasdaq Composite into the lead among the major U.S. equity indexes, while strong second-quarter GDP helped boost both the Dow and the S&P 500.

Second-quarter GDP rose 2.4% compared with 2% growth during the quarter ended in March, while weekly jobless benefit claims fell to the lowest since February. A strong economy could hurt the Fed’s inflation fight and result in higher rates for longer.

Carol Schleif, chief investment officer at BMO Family Office said the GDP data is “supportive of the soft landing scenario,” as it’s clear that the Fed has yet to cause a recession even after its many interest-rate hikes over the past a year and half, while inflation is coming down, which is the “exact outcome investors were hoping for,” said Schleif in emailed comments on Thursday.

The Federal Reserve on Wednesday raised its benchmark interest rates by 25-basis-point to a range of 5.25% to 5.5%, the highest level in 22 years. In the press conference, the Chair Jerome Powell made news by saying the Fed staff is now forecasting a “noticeable slowdown” rather than a recession as policy makers have seen the recent resiliency in the economic data.

Traders are betting that this could be the final rate hike of a cycle that began in March 2022, when the Fed first lifted interest-rates off the zero-bound, where they had languished since the advent of the COVID-19 pandemic.

The stronger-than-expected results from the largest U.S. companies during the second quarter had helped drive stocks higher in July, boosting the Dow’s historic winning streak. However, the gauge snapped its longest win streak in almost 40 years on Thursday as stocks pulled back and Treasury yields surged.

To be sure, Wall Street had low expectations heading into the quarter, which is expected to be the third consecutive quarter of negative earnings growth for S&P 500 index companies. So companies’ earnings beats are “a little like dunking on an 8-foot hoop,” said Jason Krupa, vice president of asset management at Lenox Advisors, during a phone interview with MarketWatch.

In aggregate, S&P 500 companies are beating Wall Street’s earnings expectations by 7.1% so far, according to the latest data from Refinitiv. That’s compared with a the long-term average of 4.1%.

In other central banking news, the European Central Bank followed the Fed with an interest-rate hike of its own. It raised its deposit rate by 25 basis points, or a quarter of a percentage point, to 3.75%.

Companies in focus

• Meta Platforms Inc. stock META, +4.40% rose 5.7% on Thursday after the Facebook and Instagram parent handily beat Wall Street expectations for its second quarter and ad revenue jumped.
• Chipotle Mexican Grill Inc. CMG, -9.81% tumbled 9.8% after the fast-casual restaurant chain said inflation hit some of its most popular menu items.
• Mattel Inc. MAT, -0.38% late on Wednesday reported second-quarter results that beat estimates, but the toy maker held to its full-year outlook as the “Barbie” movie’s blowout debut weekend clashed with continued muted demand for toys. Shares fell 0.4% on Thursday.
• eBay Inc. EBAY, -10.53% dipped 10.5% after the e-commerce site’s earnings outlook came in lower than expected.
• Southwest Airlines LUV, -8.94% tumbled 8.9% after the airline said its revenue has not yet recovered to prepandemic levels and it’s adjusting its 2024 flight schedule to reflect changes to customer patterns.