U.S. stock indexes finished lower on Thursday, with the Dow Jones Industrial Average snapping a historic winning streak of 13 straight gains, as stocks erased an early advance scored after gross domestic product figures showed the U.S. economy picked up steam in the second quarter.

What happened

  • The Dow Jones Industrial Average
    DJIA,
    -0.67%
    dropped 237.40 points, or 0.7%, to end at 35,282.72

  • The S&P 500
    SPX,
    -0.64%
    was off 29.34 points, or 0.6%, to finish at 4,537.41

  • The Nasdaq Composite
    COMP,
    -0.55%
    lost 77.17 points, or 0.6%, ending at 14,050.11

The Dow rose 0.2% on Wednesday, its 13th straight session in the green — the longest such winning streak since 1987.

What drove markets

U.S. stocks initially benefited from the latest batch of strong earnings reports and economic data on Thursday morning. However, the three major stock indexes reversed early gains to end lower in afternoon trading as bond yields jumped and after a news report said the Bank of Japan will discuss tweaking its yield-curve control policy at a policy board meeting Friday.

The BOJ potentially may let long-term interest rates rise beyond its cap of 0.5%, by a certain degree, according to the report.

See: Yen strengthens, stocks wobble after report Bank of Japan will discuss tweak to monetary policy

The yield on the 2-year Treasury
TMUBMUSD02Y,
4.911%,
which is more sensitive to imminent central banks’ move, rose 11.4 basis points to 4.939% from 4.83% on Wednesday, while the yield on the 10-year Treasury 
TMUBMUSD10Y,
3.992%
soared 16.1 basis points to 4.011%, according to Dow Jones Market data.

The Bank of Japan began implemented yield-curve control, or YCC, in 2016, a policy that aims to keep government bond yields low, while ensuring an upward sloping yield curve. Under the policy control, the BOJ buys whatever amount of Japanese government bonds they think is necessary to ensure the 10-year yield remains below 0.5%.

However, rising inflation and interest-rate hikes by other major central banks around the world, including the Federal Reserve and the European Central Bank, are fueling concern that Japanese yields could climb past the 0.5% threshold.

Quincy Krosby, chief global strategist for LPL Financial, told MarketWatch in a phone interview that currency markets were rattled by the news report indicating the BOJ may tweak its policy.

The yen strengthened on Thursday afternoon. The U.S. dollar was off 0.6% versus the currency, fetching 139.46 yen
USDJPY,
-0.20%,
according to FactSet data.

Meanwhile, Krosby pointed out it doesn’t take very much to cause a selloff or a correction in “an already overbought” U.S. stock market.

Shares of Honeywell International Inc.
HON,
-5.69%
tumbled after the company reported second-quarter earnings that exceeded Wall Street expectations, but markets were disappointed as revenue that came up a bit shy as continued strength in aerospace was offset by weakness in safety and productivity. Shares finished 5.7% lower on Thursday, which also dragged down the blue-chip gauge, said Krosby.

Earlier in the session, an earnings beat by Meta Platforms
META,
+4.40%,
the owner of Facebook and Instagram, helped catapult the Nasdaq Composite into the lead among the major U.S. equity indexes, while strong second-quarter GDP helped boost both the Dow and the S&P 500.

See: GDP increases at 2.4% annual pace in the second quarter

Second-quarter GDP rose 2.4% compared with 2% growth during the quarter ended in March, while weekly jobless benefit claims fell to the lowest since February. A strong economy could hurt the Fed’s inflation fight and result in higher rates for longer.

Carol Schleif, chief investment officer at BMO Family Office said the GDP data is “supportive of the soft landing scenario,” as it’s clear that the Fed has yet to cause a recession even after its many interest-rate hikes over the past a year and half, while inflation is coming down, which is the “exact outcome investors were hoping for,” said Schleif in emailed comments on Thursday.

The Federal Reserve on Wednesday raised its benchmark interest rates by 25-basis-point to a range of 5.25% to 5.5%, the highest level in 22 years. In the press conference, the Chair Jerome Powell made news by saying the Fed staff is now forecasting a “noticeable slowdown” rather than a recession as policy makers have seen the recent resiliency in the economic data.

Traders are betting that this could be the final rate hike of a cycle that began in March 2022, when the Fed first lifted interest-rates off the zero-bound, where they had languished since the advent of the COVID-19 pandemic.

See: Fed no longer foresees a U.S. recession — and other things we learned from Powell’s press conference

The stronger-than-expected results from the largest U.S. companies during the second quarter had helped drive stocks higher in July, boosting the Dow’s historic winning streak. However, the gauge snapped its longest win streak in almost 40 years on Thursday as stocks pulled back and Treasury yields surged.

To be sure, Wall Street had low expectations heading into the quarter, which is expected to be the third consecutive quarter of negative earnings growth for S&P 500 index companies. So companies’ earnings beats are “a little like dunking on an 8-foot hoop,” said Jason Krupa, vice president of asset management at Lenox Advisors, during a phone interview with MarketWatch.

In aggregate, S&P 500 companies are beating Wall Street’s earnings expectations by 7.1% so far, according to the latest data from Refinitiv. That’s compared with a the long-term average of 4.1%.

In other central banking news, the European Central Bank followed the Fed with an interest-rate hike of its own. It raised its deposit rate by 25 basis points, or a quarter of a percentage point, to 3.75%.

Companies in focus

Steve Goldstein contributed