Wall Street posts its worst performance of the year as Home Depot (HD:NYSE) and Walmart (WMT:NYSE) issue bleak forecasts

Wall Street posted its worst performance of the year on Tuesday, with the main benchmarks ending down as investors interpreted a rebound in U.S. business activity in February to mean interest rates will need to stay higher for longer to control inflation.

After rallying sharply to kick off 2023, stocks have stumbled in recent weeks as hot economic data have made investors anxious about the trajectory of U.S. monetary policy.

The S&P 500 declined 81.75 points, or 2%, to 3997.34 on Tuesday. The Dow Jones Industrial Average fell 697.10 points, or 2.1%, to 33129.59, erasing its gains for the year. The technology-focused Nasdaq Composite dropped 294.97 points, or 2.5%, to 11492.30. All 11 sectors of the S&P 500 traded lower, as did 29 of the 30 stocks in the Dow.

Although inflation has fallen from its recent peak, it remains high. The unemployment rate has fallen to a 53-year low, and retail sales are growing at a healthy clip. That combination has led investors to expect the Fed to continue raising interest rates and then keep them elevated for longer.

Those shifting expectations have started to take the steam out of the stock market’s rebound, with the S&P 500 down 4.4% from its closing peak this year.

Among those hit by Tuesday’s widespread declines were big tech stocks, with Tesla (TSLA:NASDAQ), Amazon (AMZN:NASDAQ), Microsoft (MSFT:NASDAQ) and Google (GOOG:NASDAQ) all falling between 2.1% and 5.3%.

Elsewhere, Home Depot (HD:NYSE) slumped 7.1% to $295.50 – a three-month low and its largest one-day percentage decrease in a year – after the company warned of weakening demand and issued a sour profit forecast for 2023. The disappointing report from the No. 1 domestic home improvement chain in the United States sent ripples through the market. Shares of rival Lowe’s (LOW:NYSE) dropped $10.90, or 5.1%, to $201.85.

Home Depot’s (HD:NYSE) fall shaved 148 points off the Dow and weighed on the consumer-discretionary segment of the S&P 500, which dropped 3.3% as the index’s weakest link.

On the other hand, Walmart (WMT:NYSE) shares rose 89 cents, or 0.6%, to $147.33 and were the sole gainer in the Dow. World’s biggest retailer reports solid fourth quarter but forecasts miss Wall Street estimates

Walmart executives said the strong December sales in the US were led by food, but that was partially offset by declines for general merchandise sales. That ate into profits as it has in recent quarters, as food tends to be less profitable than items such as clothing and toys.

Walmart said it expected sales growth to moderate in the second half of this year, prompting the world’s largest retailer to issue a cautious outlook for 2024 as it observes the impact of the Federal Reserve’s aggressive campaign to raise interest rates.

The company set sales and earnings forecasts below analysts’ expectations, even as it reported a strong fourth-quarter in which bargain-hunting shoppers underpinned spending in December that was the biggest month in sales on record for Walmart’s US operations.

“There’s just a lot that we don’t know,” Walmart chief executive Doug McMillon told analysts during a Tuesday earnings call.

Shares of Palo Alto Networks (PANW:NASDAQ) popped more than 7% after earnings and revenue for the recent quarter surpassed Wall Street’s expectations, according to Refinitiv. Palo Alto Network’s earnings guidance for its fiscal third quarter also came in above consensus expectations.

The company’s revenue rose 26% year over year in the quarter, which ended Jan. 31, according to a statement. Net income came in at $84.2 million, or 25 cents per share, compared with a loss of $93.5 million in the year-ago quarter.

Palo Alto Networks has now posted three consecutive quarters of profitability following a decade of being in the red. It’s now three years ahead of profitability goals it laid out in 2021, CEO Nikesh Arora said on the call.