U.S. stocks ended sharply lower on Tuesday as regional bank shares tumbled on renewed fears over the financial system and as investors tried to gauge how much longer the Federal Reserve may need to hike interest rates.
The Fed is expected to raise rates 25 basis points on Wednesday, and investors are anxious for any signals from the central bank on whether it will be the last hike for now, or if further increases are possible if inflation remains high.
The KBW regional banking index (.KRX) hit its lowest level intraday since late 2020.
Energy shares dropped along with oil prices as investors worried about a potential U.S. debt default.
Treasury Secretary Janet Yellen said the federal government could be unable by June 1 to meet all of its payment obligations without legislation to raise Washington’s borrowing limit.
The S&P 500 energy sector (.SPNY) was down the most of any major sector, followed by S&P financials (.SPSY).
U.S. regional banks extended losses from Monday after the seizure and auction of First Republic Bank (FRC.N). Most of its assets were bought by JPMorgan Chase & Co (JPM.N) in a deal brokered by the Federal Deposit Insurance Corp.
Two other U.S. regional banks collapsed in March.
“There are concerns that this is not over, and that rates are going to (continue to) go up, and it could be a catalyst for more problems,” said Quincy Krosby, chief global strategist at LPL Financial in Charlotte, North Carolina.
“There’s more and more talk about problems with commercial real estate. Commercial real estate really is, for the most part, the province of the regional banks.”
Higher borrowing costs hurt both consumers and businesses.
According to preliminary data, the S&P 500 (.SPX) lost 48.82 points, or 1.17%, to end at 4,119.05 points, while the Nasdaq Composite (.IXIC) lost 132.49 points, or 1.11%, to 12,077.29. The Dow Jones Industrial Average (.DJI) fell 365.40 points, or 1.09%, to 33,680.41.
Among bank shares, PacWest Bancorp (PACW.O) tumbled, along with Western Alliance Bancorp (WAL.N) and Comerica Inc (CMA.N).
Educational services company Chegg (CHGG.N) tanked on a downbeat second-quarter revenue forecast as competition from ChatGPT grew.