Mixed finish on Wall Street as worldwide rally takes a pause

Wall Street is tapping the brakes on its record-setting rally this week, as markets worldwide take a pause on Friday.

The S&P 500 was 0.1% lower in afternoon trading, a day after inching up to its second straight all-time high. The Dow Jones Industrial Average was down 119 points, or 0.4%, at 31,057, as of 2:57 p.m. Eastern time, and the Nasdaq composite was up 0.1%.

The modest losses for global markets started early in Asia and then carried westward amid worries about resurgent coronavirus cases in China and weak economic data from Europe. In the United States, disappointing earnings reports from IBM and some other companies gave cover for investors to sell and book profits after big recent gains. The S&P 500 is still on pace to climb 2.1% this week, its third weekly gain in four.

“The big picture is, it’s still a pretty friendly environment for stocks,” said David Lefkowitz, head of Americas equities at UBS Global Wealth Management. ”The pandemic will wind down, you’ll see a surge in corporate profits this year and the Fed made very clear they’re not going to take the punch bowl away anytime soon."

IBM dropped 9.9% for one of the market’s sharpest losses after reporting weaker revenue for the last three months of 2020 than analysts expected. The tech giant’s revenue has been mostly shrinking for years.

IBM nevertheless also reported a higher profit for the end of 2020 than Wall Street expected. That’s been the big theme so far in the early part of this earnings season, with about 13% of companies in the S&P 500 having reported. With bank and some other industries leading the way, profit reports have consistently come in better than Wall Street had feared.

“Earnings have been spectacular," said David Lyon, global investment specialist at J.P. Morgan Private Bank.

Seagate Technology fell 5.2% despite joining that cavalcade of companies reporting better earnings than expected. It also gave a forecast for revenue and profit in the current quarter that matched or topped Wall Street’s. Analysts said a lot of that optimism may have already been built into the stock’s price.

Markets have been mostly rallying recently on hopes that COVID-19 vaccines will lead to a powerful economic recovery later this year as daily life gets closer to normal. Hopes are also high that Washington will deliver another dose of stimulus for the economy now that the White House and both houses of Congress are under single control of the Democrats.

President Joe Biden has proposed a $1.9 trillion plan to send $1,400 to most Americans and deliver other stimulus for the economy. But his party holds only the slimmest possible majority in the Senate, raising doubts about how much can be approved. Several Republicans have already voiced opposition to parts of the plan.

The coronavirus pandemic is also worsening and doing more damage to the economy by the day. In Europe, a survey of purchasing managers showed on Friday that activity in the manufacturing and services sectors shrank during January in the 19-country eurozone. The data suggests the eurozone’s economy may contract again this quarter.

In European stock markets, France’s CAC 40 fell 0.6%, and Germany’s DAX lost 0.2%. The FTSE 100 in London dropped 0.3%.

In China, where the pandemic began in late 2019, the government has reimposed travel controls after outbreaks in Beijing and other cities. A spike in infections has authorities calling on the public to avoid travel during February’s Lunar New Year holiday, normally the year’s most important family event.

That has “raised some concerns among investors who, after a slow start to the global vaccine rollout, are debating how fast economies can vaccinate the most vulnerable and start returning to business as usual,” said Stephen Innes of Axi in a report.

Stocks in Shanghai slipped 0.4%, while Hong Kong’s Hang Seng lost 1.6%. Japan’s Nikkei 225 fell 0.4%, and South Korea’s Kospi dropped 0.6%.

The U.S. economy has also been taking hits recently, with reports showing weakness in the job market and falling confidence among shoppers. But the data has been mixed.

One report on Friday showed the housing industry continues to be a bright spot for the economy. Sales of previously occupied homes were stronger last month than economists expected. A separate report from IHS Markit gave a preliminary reading on U.S. business activity for January that was also stronger than expected, indicating an acceleration in growth.

One major underpinning for the market seems to have little chance of going away soon: massive support from the Federal Reserve. The central bank is holding short-term interest rates at a record low and making other moves in hopes of boosting markets and the economy.

The yield on the 10-year Treasury note was holding steady at 1.09%. It has been mostly climbing this month, up from roughly 0.90% at the start of the year, with expectations for increased government borrowing, economic growth and inflation.

A big question on Wall Street is how much more it can climb before criticism blares even louder that stock prices have grown too expensive relative to corporate profits.