Midday gains for U.S. equities quickly faded in late-afternoon action, with stocks finishing solidly lower, as the markets remained uneasy over inflation pressures and the prospect of a more aggressive Fed persisted. The Consumer Discretionary and Information Technology sectors led to the downside, while Financials were also lower, despite Bank of America rising on favorable loan growth, net interest income, and expenses, and shares of Morgan Stanley gaining after posting stronger-than-expected equity trading revenues and expenses that were below forecasts. Shares of Procter & Gamble and UnitedHealth Group were both higher after also reporting better-than-expected results, but of little help to the Dow. The economic calendar was focused on housing, showing unexpected growth in December housing construction and a rise in mortgage applications. Treasuries were higher to apply downside pressure on yields, and the U.S. dollar dipped, while gold and crude oil prices traded to the upside. Europe finished mixed even as yields continued to climb, and the euro and British pound rose, with U.K. inflation data in focus. Asia was mostly lower, with Japan falling as shares of Sony dropped following yesterday's announcement of a merger agreement between two competitors.

The Dow Jones Industrial Average fell 340 points (1.0%) to 35,029, the S&P 500 Index declined 44 points (1.0%) to 4,533, and the Nasdaq Composite tumbled 167 points (1.2%) to 14,340. In heavy volume, 4.4 billion shares of NYSE-listed stocks were traded, and 4.6 billion shares changed hands on the Nasdaq. WTI crude oil rose $0.97 to $85.80 per barrel. Elsewhere, the gold spot price jumped $30.60 to $1,843.00 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—declined 0.2% to 95.55.

Bank of America Corp. (BAC $46) reported Q4 earnings-per-share (EPS) of $0.82, above the $0.77 FactSet estimate, as revenues grew 10.0% year-over-year (y/y) to $22.1 billion, compared to the Street's forecast of $22.2 billion. BAC said its Q4 results were driven by strong organic growth—excluding the impacts of acquisitions, divestitures and foreign exchange—record levels of digital engagement, and an improving economy. BAC said it saw loan growth and added $100 billion in deposits, while its revenues rose faster than expenses, producing its second-straight quarter of y/y positive operating leverage, and its net interest income increased and came in above forecasts, despite the challenging rate environment.

The company added that its investment banking and wealth management businesses continued to benefit from robust markets, while its asset quality remained strong enabling it to release loan loss reserves again this year. However, trading revenues were lower for fixed income and were flat for equities. BAC said in 2022 it expects expenses to be flat y/y, which was a bit better than some of its peers which forecasted higher expenses moving forward. Shares were higher.

Morgan Stanley (MS $96) reported adjusted Q4 EPS of $2.08, north of the $1.94 expectation, as revenues rose 6.8% y/y to $14.5 billion, just shy of the projected $14.6 billion. The company's expenses that came in below estimates were a highlight, along with much strong-than-expected equity trading revenues. However, MS' fixed income trading revenues fell more than expected, and its key wealth management unit's performance was in line with forecasts, while its investment banking unit's revenues grew but came in slightly below forecasts. MS traded to the upside.     

Higher compensation costs have increased expenses for some heavyweights in the Financials sector as we have seen thus far during the beginning of Q4 earnings season. Schwab's Chief Investment Strategist Liz Ann Sonders notes in her latest article, We Can Work It Out: Update on Labor Market, the labor market remains tight—hence the stepped-up pace of balance sheet tapering by the Federal Reserve, and the market now expecting multiple rate hikes this year.

She provides one historical nugget of truth to keep in the back of your mind as the Fed embarks on its rate hiking cycle: in the post-WWII era, every time (12 occurrences) that the Fed was raising rates—and the three-month moving average of the unemployment rate rose by at least .35 percentage points—a recession has unfolded. For now, Liz Ann notes that the good news is that the unemployment rate continues to descend; but keen observers will understand the potential economic implications of an eventual turn back up—especially if rate hikes are still underway.

Dow member Procter & Gamble Company (PG $162) posted adjusted fiscal Q2 earnings of $1.66 per share, above the expected $1.65, with revenues rising 6.0% y/y to $21.0 billion, exceeding the forecasted $20.3 billion, with organic sales also rising 6.0%, besting estimates of a 3.7% gain. The company said the increase in organic sales was driven by increased shipment volumes and increased pricing to help offset the significant commodity and other input costs increases. PG reaffirmed its full-year EPS guidance and raised its outlook for organic sales, though it noted headwinds from higher commodity costs, higher freight costs, and foreign exchange. Shares finished higher. 

Dow member UnitedHealth Group Incorporated (UNH $463) announced Q4 EPS of $4.48, above the expected $4.30, with revenues rising 12.5% y/y to $73.7 billion, topping the estimated $73.0 billion, noting continued broad-based growth across the enterprise. UNH reaffirmed its 2022 guidance. UNH traded higher. 

Find all our market commentary on our Market Insights page and follow us on Twitter at @SchwabResearch.

Housing construction activity unexpectedly rises in December

Housing starts (chart) for December rose 1.4% month-over-month (m/m) to an annual pace of 1,702,000 units, above forecasts of 1,650,000 units, and compared to November's downwardly-revised pace of 1,678,000 units. Also, building permits, one of the leading indicators tracked by the Conference Board as it is a gauge of future construction, jumped 9.1% m/m at an annual rate of 1,873,000, north of expectations calling for 1,703,000 units, and compared to the upwardly-revised 1,717,000 unit pace in November.

In other housing news, the MBA Mortgage Application Index rose 2.3% last week, following the prior week's increase of 1.4%. The gain came as a 3.1% drop for the Refinance Index was more than offset by a 7.9% jump for the Purchase Index even as the average 30-year mortgage rate continued to climb, rising 12 basis points (bps) to 3.64%.

Treasuries were higher, as the yield on the 2-year note ticked 1 bp lower to 1.03%, while the yields on the 10-year note and the 30-year bond lost 3 bps to 1.84% and 2.15%, respectively. 

Treasury yields have moved higher but the curve has flattened as of late with the short end is rising much more than the medium-to-longer end. The flattening has occurred as the markets grapple with how aggressive the Fed will be in its response to combating surging inflation and what the implications on economic growth could be. Schwab's Chief Fixed Income Strategist, Kathy Jones notes in her latest article, The Fed's Policy Tightening Plan: A One-Two Punch, how beginning quantitative tightening soon after rate hikes is a big departure from the Federal Reserve's past policy.

Tomorrow's economic calendar will hold weekly initial jobless claims for the week ended January 15, forecasted to show 225,000 first-time unemployment claims were filed, followed by the Philadelphia Fed Business Outlook Index, expected to move further into expansionary territory (a reading above zero) to a level of 19.0 for January from December's 15.4. After the opening bell, existing home sales will be released, anticipated to have declined 0.5% m/m during December to an annual rate of 6.43 million units.

Europe mixed following yesterday's drop, Asia mostly lower

European equities finished mixed, even as the Energy sector saw only a modest increase after recent strong outperformance, with value/cyclical stocks, such as Materials and Industrials, moving higher, though Financials lagged despite the continued rise in bond yields. Information Technology issues lost steam later in the trading session to finish lower after rebounding on both sides of the pond from a recent selloff that has come amid the rising global bond yields and increasing expectations that monetary policies, led by the Fed in the U.S., are set to move aggressively down the tightening path. The expectations are ramping up as inflation pressures persist and the rapidly-spreading omicron variant has also exacerbated global supply chain issues and hampered economic activity. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, discusses in his latest article, What Do Rising Rates Mean for Stock Investors?, how recently, U.S. Treasury bond yields climbed back to their pre-pandemic levels and in Europe, German 10-year yields climbed to near 0%, touching their highest level since May 2019. Jeff asks the question of what are the implications of rising global yields for stock prices? He points out that increasing yields could help lift stocks and may even signal outperformance of cyclical European stocks and value stocks.

In economic news, U.K. inflation figures are in focus, with consumer and retail prices for December coming in hotter than expected, though producer prices in the region came in cooler than expected. Also, Eurozone construction output declined in November. The euro and British pound traded to the upside versus the U.S. dollar, and bond yields in the Eurozone and the U.K. were higher, with the latter rising solidly on the inflation data and the rate on Germany's benchmark 10-year bond continuing to flirt with moving out of negative territory.  

The U.K. FTSE 100 Index gained 0.4%, Germany's DAX Index was up 0.2%, and France's CAC-40 Index advanced 0.5%, while Switzerland's Swiss Market Index was little changed, Spain's IBEX 35 Index ticked 0.1% lower, and Italy's FTSE MIB Index declined 0.4%.

Stocks in Asia mostly finished with solid declines on the heels of yesterday's selloff in the U.S. yesterday. The global markets remain volatile as inflation pressures remain a key point of contention, which has bolstered expectations that monetary policies are set to tighten, except for in China which lowered its 1-year medium-term rate this week and signaled that more may be in the offing to stabilize the economy. Expectations are growing that China may be poised to announce cuts to its 1-year loan prime rate tonight. The persistent rise in crude oil prices have amplified the inflationary pressures and concerns, but this has also led to the continued outperformance for the Energy sector. In economic news, Hong Kong's unemployment rate unexpectedly declined in December but Australian consumer confidence for January deteriorated somewhat.

As noted in our latest Schwab Market Perspective: Bumps in the Road, the effects of the COVID-19 virus have continued to drive—and brake—economic growth. Stocks sank in early January as investors reacted to the fast-spreading omicron variant and the Federal Reserve’s signals around inflation, including the possibility it will begin "quantitative tightening" much faster than previously expected. However, there are signs that inflation pressures already may be peaking in the United States and Europe.

Japan's Nikkei 225 Index fell 2.8%, with the yen rallying late in the session versus the U.S. dollar. Moreover, Japanese markets were bogged down by a drop in shares of Sony Group Corporation (SONY $110) following yesterday's news that Microsoft Corporation (MSFT $303) announced a near $69.0 billion agreement to acquire Activision Blizzard Inc. (ATVI $82). Elsewhere, China's Shanghai Composite Index declined 0.3%, and South Korea's Kospi Index decreased 0.8%. Australia's S&P/ASX 200 Index traded 1.0% lower, and India's S&P BSE Sensex 30 Index dropped 1.1%. However, the Hong Kong Hang Seng Index ticked 0.1% higher to buck the trend.

Tomorrow's international economic calendar will offer trade data from Japan, employment figures from Australia, PPI from Germany and CPI from the Eurozone.