Dow falls with debt-ceiling and regional-bank worries in focus

What’s driving markets

Stocks were down Friday afternoon, following a two day rally, as investors weighed a potential pause in debt ceiling talks in Congress and a slump in banks shares after Treasury Janet Yellen reportedly told banks that more mergers may be necessary.

A CNN report, citing two people familiar with the matter, raised the prospect that more regional banks may have to be bought by larger too-big-to-fail firms. The SPDR S&P Regional Banking ETF
KRE,
-1.92%
was down 2.3% in afternoon trading, according to FactSet data, at last check.

Meanwhile, debt-ceiling negotiations are at a “pause,” said Republican Rep. Garret Graves of Louisiana, a key ally of House Speaker Kevin McCarthy. Graves suggested the White House’s representatives in the talks were being “unreasonable.”

“There are real differences between the parties on budget issues and talks will be difficult,” a White House official said. “The president’s team is working hard towards a reasonable bipartisan solution that can pass the House and the Senate.”

Read: ‘Doomsday machine’: Here’s what could happen if the debt ceiling is breached

Edward Moya, a senior market analyst for the the Americas at OANDA, said in a note Friday that “finally, we are seeing posturing and some heated debate for this debt deal.” The U.S. may breach its debt ceiling as soon as June 1, potentially running out of cash to pay all its bills if Congress fails to raise it, Treasury Secretary Janet Yellen has warned.

“Wall Street thought we were going to see bill text over the weekend or early on Monday, with a potential vote in the middle of the week,” said Moya. “That seems less likely now and could raise the risk that we won’t get an agreement before June 1st.”

Stocks gave up earlier gains, which were supported in part by hopes for a debt ceiling deal next week and better-than-expected corporate earnings.

Still, Matt Stucky, a senior portfolio manager for equities at Northwestern Mutual Wealth Management Co., said a phone interview Friday that he’s expecting a recession in the second half of the year. He said that quarterly earnings reports this week from retailers such as Foot Locker Inc.
FL,
-27.42%
“paint a picture of a consumer that is starting to pullback.”

Also on Friday, Federal Reserve Chair Jerome Powell, in a moderated discussion alongside former Fed Chair Ben Bernanke, said the central bank faces uncertainty about the extent of credit tightening from recent banking stress, with tighter credit conditions likely to slow economic growth, hiring and inflation. “Our policy rate may not need to rise as much as it would have otherwise to achieve our goals,” he said.

The Fed has aggressively raised its benchmark interest rate over the past year in effort to tame high inflation. Powell said Friday that his colleagues think that it will take some time to bring inflation back to the central bank’s 2% target.

Meanwhile, all three major stock benchmarks remained up for the week after turning lower Friday. The Dow Jones Industrial Average was on track for a 0.4% weekly rise, while the S&P 500 was on pace to gain 1.7% and the technology-heavy Nasdaq Composite was heading for 3% gain, FactSet data show, at last check.

The Nasdaq looked set to rise for a fourth straight week, potentially booking its longest win streak since the week ending in early February, according to Dow Jones Market Data.

Tech stocks have benefited from investor interest in artificial intelligence, said Stucky. The investment thesis around AI and what it can do for “company efficiency” and for “overall productivity” for the economy is “a good story,” he said.

Companies in focus

• Applied Materials Inc. shares
  AMAT,
  -2.23%
  fell after the chip-making equipment provider’s earnings topped Wall Street expectations, but its outlook wasn’t as robust as expected.

• Deere & Co. 
  DE,
  -1.80%
  was off after the maker of agricultural, construction and forestry equipment reported fiscal second-quarter results that beat expectations by wide margins and raised its net income outlook, with particular strength in its production and precision agriculture business.

• Foot Locker Inc. 
  FL,
  -27.42%
  stock fell after the company reported first-quarter sales and earnings below analysts’ expectations and lowered its outlook.

—Steve Goldstein contributed to this report.