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U.S. stocks finish lower for 4th straight day as investors await July inflation report

By Joseph Adinolfi and William Watts

Chip maker woes helped drive the Nasdaq to its third straight daily loss

U.S. stocks finished lower on Tuesday as anxieties about looming inflation data and a selloff in semiconductor stocks drove the S&P 500 to its fourth straight losing session.

What happened

On Monday, the Dow eked out a gain of 0.1%, while the S&P 500 and Nasdaq Composite each lost 0.1% after an opening rally fizzled.

What drove markets

Stocks fell as warnings from semiconductor stalwarts Nvidia Corp(NVDA) and Micron Technology Inc. (MU) rattled chip stocks even as President Joseph Biden signed the bipartisan Chips and Science Act into law Meanwhile, anxieties ahead of inflation reports due out Wednesday and Thursday helped to put the market's recent rally on pause.

"There's a lot of nervousness around the inflation reports coming out tomorrow and Thursday," said Paul Nolte, a portfolio manager at Kingsview Investment Management. "And continued weakness in the chips sector, which has historically been seen as a market-leading sector, is also helping to hold stocks back."

Hopes that inflation had peaked briefly helped the S&P 500 index bounce more than 13% off its June low, as some investors embraced the theory that slowing inflation could empower the Federal Reserve to pivot toward a less aggressive pace of monetary tightening. But as the index in recent days gave back some gains, the index close up 12.4% from its 12-month low set on June 16, according to Dow Jones Market Data.

The slump has come after many analysts and several senior Fed officials warned that hopes for such a shift might be premature.

See: U.S. consumers likely got some relief from sizzling price increases in July but Fed won't feel any better

See also: Don't be fooled by a drop in U.S. headline inflation. Markets will be attuned to another figure on Wednesday

Looking ahead to the release of the July reading of the consumer-price index, economists expect a dip in energy prices will have helped the pace of consumer-price gains to retreat from a multidecade high. Year-over-year headline CPI increased by 9.1% in June, the highest level in four decades. Economists polled by FactSet expect headline CPI to slow to 8.7%, but a hotter-than-expected reading on either the headline number, or the core number -- which strips out volatile food and energy prices -- could rattle markets, analysts warned.

"A hotter-than-anticipated CPI report will pressure markets this week. An in-line report could be taken in stride as investors have priced in a 75 basis point move by the Fed in September," said Lindsey Bell, chief markets and money strategist for Ally.

"Either way, we still have to get through another jobs report, more inflation data, and Jackson Hole before we get to the Fed's September meeting," Bell said in emailed comments, referring to the annual central banker retreat in Wyoming later this month. "It could be a volatile several weeks ahead."

A drop Monday in the New York Fed's measure of consumer inflation expectations was taken as a positive sign, but strong wage growth data in Friday's July jobs report and a large rise in unit labor costs in data released Tuesday were a source of unease, analysts said.

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Meanwhile, investors have been debating whether the latest stock market advance is the start of a more prolonged uptrend or a rally that will fail when faced with slower economic growth and higher interest rates.

Read: Why the S&P 500's 'bounce within a bear market' could fizzle before it hits 4,200

As the second-quarter earnings season comes to a close, Wells Fargo strategists warned that profit projections have been too rosy, potentially removing another support from the market.

"We expect slowing revenue growth and higher costs to squeeze margins in the coming quarters, likely leading to an earnings recession over the next 12 months," the Wells Fargo analysts said in a note to clients.

Need to Know:The red flag that preceded a halving of global equities in 2000 and 2007 is back, warns Citi

Meanwhile, the "meme-stock" phenomenon returned this week, with Bed Bath & Beyond Inc.(BBBY) shares soaring 36% Monday with no apparent news driving the move, only to slump 14.2% Tuesday. AMC Entertainment Holdings Inc. (AMC) and GameStop Corp. (GME) also jumped Monday, but fell 6.3% and 7.1%, respectively, the next day.

-Joseph Adinolfi

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(END) Dow Jones Newswires

08-09-22 1649ET

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