Stocks fall hard amid rising interest rates and earnings fears

U.S. stocks took steep losses Tuesday despite solid corporate earnings reports as rising interest rates spurred uncertainty among investors.

The Dow Jones industrial average closed 424 points lower, a 1.74 percent drop, after falling more than 600 points by midday Tuesday. The Nasdaq fell 1.7 percent on the day, while the S&P 500 sunk 1.34 percent.

The yield on 10-year Treasury bonds rose to 3 percent for the first time since 2014 on Tuesday, a threshold that investors generally associate with a fading stock market.

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Sectors posting the biggest losses included technology (2 percent), materials (2.69 percent) and industrial (2.82 percent) stocks.

Tuesday’s losses reflect a growing belief among investors that the forces behind last year’s rampant stock gains would continue to fade. The U.S. economy is still on track for a strong 2018 with record low unemployment and steady growth, but rising interest rates and inflation could spur a slowdown in equities investment.

Stocks skyrocketed in 2017 on hopes that U.S. tax cuts would spur more economic growth. Investors are now adjusting their positions to see how the economy responds to rising interest rates, what corporations will do with those earnings, and how higher levels of inflation affect the mix.

The Dow initially rose more than 130 points on strong earnings reports from Caterpillar and 3M before swiftly reversing. Caterpillar Chief Financial Officer Bradley Halverson’s prediction that the first quarter would be “the high-water mark” for the firm’s profits caused some concerns among traders.

Investors are bracing for the potential impact of several factors that could suppress the stock market, including Federal Reserve interest rate hikes and trade tensions between the U.S. and China. Rising borrowing costs and higher prices for commodities could take a chunk out of corporate earnings and redirect investments into bonds and other safe harbor assets.

Inflation is also rising after years of lagging behind the tightening labor market, which could lead the Fed to quicken the pace of planned interest rate hikes. The Fed raised rates in March and is expected to do so at least twice more in 2018, though a growing number of central bank members are predicting a third additional hike by year’s end.