Dow sinks 500 points on worries about high rates; healthcare stocks tumble

One of the big reasons the U.S. stock market has been on a nearly unstoppable run since late October is the expectation that the Federal Reserve will cut interest rates several times this year. It’s hinted as much, and an easing of rates would relieve pressure on both the economy and financial system.

But Fed officials have also said they need further confirmation that inflation is heading sustainably down to their 2% target before acting. A surprisingly strong report on U.S. manufacturing Monday, which showed a return to growth after 16 straight months of contraction, scrambled those expectations.

It’s the latest evidence of a remarkably resilient U.S. economy, but it could also add upward pressure on inflation. Progress on inflation has become bumpier recently, with reports this year coming in hotter than expected.

Traders have already drastically reduced their expectations for how many times the Federal Reserve will cut interest rates this year, halving them from a forecast of six at the start of the year. That would be in line with the three cuts that Fed officials themselves have hinted at.

Monday’s manufacturing report pushed traders to shade a minority of bets toward just two cuts this year. Another report later in the morning on the number of job openings across the country could further sway those bets. So could upcoming speeches by several Fed officials.

In the bond market, the yield on the 10-year Treasury rose back to roughly where it was in November, up to 4.39% from 4.33% late Monday.

The two-year yield, which moves more closely with expectations for Fed action, ticked up to 4.72% from 4.71%.

Beyond worries about interest rates staying high, critics also say the U.S. stock market has simply gotten too expensive following a nearly unstoppable run where it soared more than 20% in six months. Companies will likely need to deliver strong growth in profits to justify such big moves.

On Wall Street, several health care stocks led the market lower after the U.S. government announced 2025 rates for Medicare Advantage.

Analysts at Citi Research said the final rate was well below expectations given higher-trending medical costs and a big lobbying push for the industry.

At Humana, for example, analysts at Bank of America lowered their forecasts for upcoming earnings and downgraded the stock. It dropped 9.9% for the largest loss in the S&P 500.

UnitedHealth Group also fell 5.5%, and CVS Health lost 6.2%.

PVH, the company behind Calvin Klein and Tommy Hilfiger, lost more than a fifth of its value despite reporting stronger profit for the latest quarter than analysts expected. Its forecast for profit this upcoming year fell short of analysts’ estimates, in part due to weakness in Europe, and its stock dropped 23.4%.

In Europe, stocks were falling 0.8% in Paris. Germany’s DAX lost 0.8%, and London’s FTSE 100 was 0.1% lower.

In Asia, indexes were mixed. Hong Kong’s Hang Seng jumped 2.4%, but moves were much more modest elsewhere.