U.S. stocks close out worst day since mid-December as Dow ends down nearly 700 points on worries about higher peak rates

What drove markets

Investors returned from the long weekend on Tuesday in a downbeat mood as the Fed’s expectations on higher terminal rates continued to rattle stock-market investors. Three major benchmark indexes booked their worst daily percentage declines since Dec. 15, according to FactSet data.

The S&P 500 has cut its year-to-date gain in half on a percentage-point basis since peaking at 4,195 on Feb. 2, according to FactSet data. The large-cap index rose 4.1% so far this year. The Dow industrials, however, has wiped out nearly all of its year-to-date gain.

Last week, a flurry of hotter-than-expected inflation reports and commentary from Federal Reserve officials spurred investors to bet on more interest-rate hikes by the central bank. Fed funds futures traders are pricing in a 76% probability that the Fed will raise interest rates by a quarter-of-a percentage-point to between 4.75% to 5% on March 22, followed by another 25-basis-point hike in May, according to the CME FedWatch tool.

Meanwhile, traders continued to nudge up expectations for the peak in the fed-funds rate, with a few traders now penciling in a peak near 6%. Overall, traders have only recently come around to the Fed’s expectation for the fed-funds rate to peak just above 5%.

“While the stock market has staged an impressive rebound so far this year, markets are still trying to adjust to the reality that the Fed is unlikely to pivot and is instead still focused on fighting inflation, which suggests that investors should be prepared for interest rates to stay higher for longer,” said Carol Schleif, chief investment officer at BMO Family Office in Minneapolis.

“Wednesday’s FOMC minutes report is bound to reveal a closer look into the Fed’s thinking, especially given the recently released inflation and jobs numbers, which are still elevated and illustrative of a hot economy,” she said.

Minutes of the Fed’s Jan. 31-Feb. 1 policy meeting will be published on Wednesday 2 p.m. Eastern.

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On Tuesday, yields for the 2-year Treasury note
TMUBMUSD02Y,
4.724%
were coming close to the highest point in 15 years, jumping to 4.69%. The yield on the 10-year Treasury
TMUBMUSD10Y,
3.955%
advanced to 3.902%.

“Rising rates due to the market’s repricing of a potentially higher for longer monetary policy path have weighed on risk appetite,” said Adam Turnquist, chief technical strategist at LPL Financial. “Benchmark 10-year Treasury yields have now cleared key resistance at 3.90%, elevating upside risk in yields, which will likely continue to weigh on equities.”

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Tensions over Russia’s invasion of Ukraine as the first anniversary of the war approaches also added to the market anxiety. U.S. President Joe Biden visited Poland on Tuesday and will consult with allies from NATO’s eastern flank, after paying an unannounced visit to Kyiv on Monday.

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Meanwhile, Chinese president Xi Jinping plans a visit to Moscow for a summit with Vladimir Putin in the coming months. Wang Yi, the country’s top diplomat, is scheduled to visit Moscow this week.

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U.S. economic data on Tuesday included the S&P flash services, which rose to a 8-month high in February, at 50.5 up from 46.8 in the prior month. The U.S. manufacturing PMI climbed to the four-month high of 47.8, up from 46.9.

While both are increases, any number below 50 points to a potentially shrinking economy.

Existing-home sales dropped to the lowest point in a decade, Tuesday data showed. January’s 0.7% decline is the 12th straight monthly decline, according to the National Association of Realtors figures.

Companies in focus

• Walmart Inc.
  WMT,
  +0.61%
  shares ended 0.6% higher on Tuesday after the retail giant reported its fourth-quarter earnings and offered its forward guidance. The company beat estimates on earnings and sales, but also offered guidance on the first quarter and the full fiscal year 2024 that fell short of expectations.

• Home Depot Inc.
  HD,
  -7.06%
  shares fell 7.1% after fourth-quarter results from the home improvement chain. While posting a beat on profit during the quarter, sales missed expectations and the company’s downbeat forward guidance cited continuing challenges with inflation, labor markets and supply chains.

• Shares of Meta Platforms Inc.
  META,
  -0.46%
  fell 0.5% after the parent company of Facebook and Instagram said it is testing a paid subscription tier to verify accounts.

• Shares of the medical device maker, Medtronic PLC
  MDT,
  +0.81%,
  ended 0.8% higher after earnings results for its fiscal third quarter. Sales and adjusted earnings-per share beat estimates and the company changed its fourth-quarter guidance on earnings per share to $5.28 to $5.30, versus prior guidance of $5.25 to $5.30.

Movers & Shakers: Home Depot and Walmart slip after earnings guidance; Facebook parent Meta rises on trial of subscription tier

—Jamie Chisholm contributed reporting to this article.