Dow tumbles over 500 points on debt-ceiling jitters

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 Dow Jones Industrial Average plunged 367.17 points, or 1.1%, to 33,684.53, the Nasdaq slipped 1.1% and the S&P 500 was down 1.2%.

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.

Energy shares dropped along with oil prices as investors worried about a potential US 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.

“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, NC.

“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.”

Worries about an economic downturn and concerns about stress in the banking sector have fueled expectations of rate cuts in the latter half of the year.

However, with inflation running well over the central bank’s 2% target and a still-strong labor market, chances of rate cuts seem less likely.

US stocks ended little changed on Monday following First Republic Bank’s weekend auction that led to a rout in the regional bank shares, while JPMorgan Chase gained after the largest US bank picked up the beleaguered lender’s assets.

Analysts expect first-quarter earnings for S&P 500 companies to fall 1.9% from a year earlier following better-than-expected reports from some technology and growth giants, a sharp improvement from the 5.1% drop expected at the start of April, according to Refinitiv data.

Pfizer fell 0.4% despite first-quarter profit beating estimates, as it was boosted by strong demand for its recently acquired products and pneumococcal vaccines.

Uber Technologies jumped 12% as the ride-hailing firm forecast quarterly core earnings above estimates. Smaller rival Lyft lost nearly 2%.

Educational services company Chegg tanked 48% on a downbeat second-quarter revenue forecast on increasing competition from ChatGPT.

Icahn Enterprises dropped 20% after short seller Hindenburg Research said it has a short position in activist investor Carl Icahn-controlled energy-to-pharma conglomerate.