U.S. stocks extended losses Tuesday as investors assessed earnings and prepared for a key inflation report due out Wednesday.
The S&P 500 fell 0.4%, while the Dow Jones Industrial Average ticked down about 0.2%. The tech-heavy Nasdaq Composite tumbled 1.2% as a warning from Micron Technology (MU) weighed on chip and technology stocks.
Shares of Micron fell 3.7% after the memory chipmaker said its fourth-quarter revenue may come in on par with or below the bottom end of a forecast range provided in the company’s earnings call June 30.
Micron’s announcement comes one day after chip industry peer Nvidia (NVDA) indicated its second-quarter revenue would drop by 19% from the prior quarter as the gaming business more broadly takes a hit from fewer purchases by consumers of discretionary items such as laptops and video game consoles.
Morgan Stanley Chief Investment Officer Michael J. Wilson and Goldman Sachs Chief U.S. Equity Strategist David J. Kostin warned in separate notes earlier this week that corporate profit margins are likely to contract next year as companies face severe cost pressures.
“While prices to the end consumer are still rising at a rapid clip, prices for producers are rising at double the pace,” Wilson wrote in a note Monday, adding that some estimates by analysts of higher margins in 2023 are “unrealistic due to sticky cost pressures and receding demand.”
Of nearly 90% of companies in the S&P 500 that have reported second quarter, companies that have unveiled negative earnings surprises have seen no price change on average two days before the earnings release through two days after the earnings release, compared to the five-year average price decrease of 2.4% during this same window for companies reporting negative earnings surprises, according to data from FactSet research.
“The market has not punished S&P 500 companies that have reported negative EPS surprises on average,” FactSet Senior Earnings Analyst John Butters pointed out.
That reality echoes the sentiment of Wilson and Kostin, which signaled skepticism around the recent rally and indicated that markets are at odds with the profit outlook.
Investors look ahead to the Consumer Price Index (CPI) for July due out Wednesday,
The headline reading is expected to reflect a slight moderation last month from the prior print, mainly helped by lower gas prices. The figure, however, is still expected to show inflation climbing at the highest pace in four decades. Economists surveyed by Bloomberg forecast the broadest measure of CPI rose by an annual 8.7% in July.
Alexandra Semenova is a reporter for Yahoo Finance. Follow her on Twitter @alexandraandnyc