Markets Recoil as Inflation Report Raises Stakes for Fed

On Friday, the yield on the two-year Treasury note jumped to 3.06 percent, up about a quarter of a point, while the yield on 10-year notes rose to 3.16 percent, up about a tenth of a point.

Ultimately for investors, the concern is how high prices and rising borrowing costs will affect consumer spending and corporate profits. Absorbing the costs would hit company profits, but passing them along could aggravate problems in the economy, said Yung-Yu Ma, the chief investment strategist for BMO Wealth Management in the United States.

“This is a very difficult moment,” Mr. Ma said. Most companies are unlikely to maintain their profit margins in the face of rising energy costs, he said.
Stock market analysts have been making what Mr. Ma called “wildly optimistic” projections for profits, which, he said, are likely to be revised in the months ahead and reflected ultimately in lower stock prices.

This week, Target’s stock fell after it cut its profit forecast for the second time in three weeks, as inflation and shifts in customer habits ate into its margins and left it with too much unsold inventory, which it said it would try to sell at a discount.

The S&P 500 is now down 18.7 percent from its Jan. 3 record, bringing it back within reach of bear-market territory — a drop of 20 percent from a high — which signals a serious shift in investor sentiment on Wall Street. The index briefly dipped into bear territory last month, before recovering to close just above that psychologically significant level.

Phil Orlando, the chief equity strategist for Federated Hermes, an asset management firm, said in an interview that he expected the market to decline further, perhaps 10 percent lower than current levels over the summer. He favors so-called value stocks, like those in the energy, financial and health care industries, over growth stocks, like tech companies, because they have cheaper valuations and more promise in this environment.

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