US STOCKS-Wall St slumps as business rebound undermines rate-hike thinking

(For a Reuters live blog on U.S., UK and European stock markets, click or type LIVE/ in a news window.)

*

Home Depot falls as FY profit forecast disappoints

*

Meta Platforms slips despite Facebook testing subscriptions

*

U.S. business activity rebounds to eight-month high

*

Indexes down: Dow 1.92%, S&P 1.93%, Nasdaq 2.28%

(Updates to early afternoon trade, adds context)

By Johann M Cherian and David French

Feb 21 (Reuters) -

The Wall Street benchmark indexes tumbled on Tuesday, weighed by megacap names, after data showing a rebound in business activity in February stoked fears that the U.S. Federal Reserve might need to hike interest rates by more than expected to control inflation.

The S&P Global Purchasing Manufacturer's index showed that business activity in the United States rebounded to its highest level in eight months in February to 50.2 from 46.8 in January, buoyed by a robust services sector, according to a survey.

The report adds to a recent slew of economic data which has painted a picture of a resilient economy, which continues to perform against a backdrop of multiple rate-rises by the central bank in 2022 aimed at tamping down inflation.

With inflation still far from the Fed's 2% target, and the economy retaining much of its vigor, money market participants have been revising upwards where they see the Fed fund rates peaking - currently at 5.35% in July and staying near those levels throughout the year.

"This (business activity) data doesn't do anything to get rid of the fears that the Fed might be more hawkish and might feel like taking rates higher than what investors were thinking just a month ago," said Brian Jacobsen, senior investment strategist at Allspring Global Investments.

U.S. stocks had an upbeat start to the year after their worst annual showing in more than a decade in 2022, as investors hoped the central bank's rate-hike cycle was nearing its end.

With this positive mindset driving indexes higher, it makes equity markets susceptible to pull-backs when data undermines expectations on what the Fed might do.

Among those hit by this on Tuesday were big tech stocks, with Tesla Inc, Amazon.com Inc, Microsoft Corp and Google-parent Alphabet Inc falling between 2.1% and 3.9%.

Not helping them was the fact the U.S. benchmark 10-year Treasury notes hit a fresh three-month high.

Higher yields typically weigh on growth stocks, whose valuations tend to be based on future profits that are discounted heavily as rates go higher.

By 2:09 p.m. ET (1909 GMT), the Dow Jones Industrial Average fell 649.81 points, or 1.92%, to 33,176.88, the S&P 500 lost 78.6 points, or 1.93%, to 4,000.49 and the Nasdaq Composite dropped 268.86 points, or 2.28%, to 11,518.41.

After being an exception to Tuesday's big tech woes during the morning, Meta Platforms Inc slipped 0.2%. The Facebook parent had initially been buoyed by confirmation it was testing a monthly subscription service called Meta Verified, which will let users verify their accounts using a government ID and get a blue badge.

Elsewhere, Home Depot Inc slumped 6.3% to a three-month low after the No. 1 domestic home improvement chain warned of weakening demand and issued a dour profit forecast for 2023.

Smaller rival Lowe's Cos Inc fell 5.2% ahead of its results next week.

Walmart forecast full-year earnings below estimates and painted a grim picture of hotter-than-expected food inflation squeezing profit margins. However, the world's largest retailer recovered from an initial decline to gain 0.8%.

Analysts are expecting earnings of S&P 500 companies to grow by 1.6% in 2023, compared with 4.4% growth estimated at the start of the year, as per Refinitiv data.

All of the major 11 S&P 500 sectors fell, with the consumer discretionary index's 3% decline leading the way. (Reporting by Johann M Cherian and Medha Singh in Bengaluru and David French in New York; Editing by Marguerita Choy and Anil D'Silva)