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Dow ends 425 points lower as Caterpillar leads a rollover

CNBC logo CNBC 4/24/2018 Fred Imbert and Alexandra Gibbs


Stocks fell sharply Tuesday, giving up earlier gains as investors worried about rising interest rates and reacted to comments on a conference call from bellwether Caterpillar that hinted economic growth may slow later in the year.

The Dow ended 425 points lower after rising as much as 131 points shortly after the open. The S&P 500 fell 1.34 percent. The Nasdaq declined 1.7 percent as shares of Facebook, Amazon, Alphabet and Netflix all dropped more than 4 percent.

"Investors have high expectations for earnings," said Kate Warne, an investment strategist at Edward Jones. "At the same time, a lot of people are asking: Does it get better from here? I think that's why we're seeing such shifts in the market."

Caterpillar reported earnings and revenue that beat expectations, sending the stock higher initially. But the industrial giant's shares rolled over later in the day, falling 6.2 percent. Caterpillar CFO Bradley Halverson said during a conference call that the company's outlook assumed that the first quarter would be "the high watermark for the year."

The construction equipment maker is a barometer for the state of the economy and the overall market. Caterpillar's stock has a 0.81 correlation with the Dow over the last six months, according to Kensho. A correlation of 1 would mean the two move in lockstep with each other.

3M reported quarterly earnings that met analyst expectations, but the stock dropped 6.8 percent after the company lowered its full-year profit forecast. Alphabet, meanwhile, topped bottom-line estimates but its stock declined more than 5 percent.

"You've got a market that's getting different tones in conference calls and in the reports," said Art Hogan, chief market strategist at B. Riley FBR. "When companies are asked what they are worried about, they say rising input costs" from higher rates or commodities. "That comes with no economic benefit."

Meanwhile, investors also kept an eye on the bond market, with the 10-year note yield trading at highest level since January 2014. The yield broke above 3 percent, a key psychological level, for the first time in more than four years.

Investors have been selling Treasurys this month, pushing yields higher, amid expectations of rising inflation, which could prompt the Federal Reserve to tighten monetary policy at a faster pace. 

Investors initially cheered the latest corporate earnings, sending the Dow higher by 131 points at its session high. United Technologies, Verizon and Coca-Cola reported better-than-expected earnings.

"I just think rates are a wet blanket. Plus look at the response to earnings. Look at Google, 3M, Caterpillar was up $6 this morning, and now its down. It's this violent reaction to earnings," said Peter Boockvar of Bleakley Financial Group.

"When you get this type of earnings performance it tells you a lot is priced in and people are looking at margins and guidance. When rates rise people have less tolerance for any mistakes. Even the slightest hiccup, or wrinkle is being highlighted in this type of environment," Boockvar said. 

Corporate earnings this season have mostly outperformed analyst expectations thus far. Of the S&P 500 companies that have reported as of Tuesday morning, 83 percent have posted better-than-forecast earnings, according to FactSet.


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