Dow Jones drops around 1% after a mixed start to earnings reporting season

JPMorgan Chase fell 5.1% despite reporting stronger profit for the first three months of the year than analysts expected. The nation’s largest bank gave a forecast for a key source of income this year that fell below Wall Street’s estimate.

The pressure is always on companies to produce fatter profits. But it’s particularly acute now given worries that the other main lever that sets stock prices, interest rates, may not offer much lift in the near term.

A stream of reports this year has shown that both inflation and the overall economy remain hotter than expected. Fears about inflation staying stubbornly high have forced traders to sharply scale back forecasts for how many times the Federal Reserve may cut its main interest rate this year. Traders are largely betting on just two, according to data from CME Group, down from forecasts for at least six at the start of the year.

Stock prices had already run to records in part on expectations for such cuts. Without easier interest rates, companies will need to produce bigger profits to justify their stock prices, which critics say are already too expensive by various measures.

This year’s jump in oil prices has further raised worries, because it could add pressure on inflation. They rose again Friday as tensions continue to roil the Middle East. Israel has said it could strike Iran directly if it launched an attack from its territory following the killings of Iranian generals in a blast at the Iranian consulate in Syria.

A barrel of benchmark U.S. crude gained 3% to $87.52. Brent crude, the international standard, rose 2.4% to $91.87 and is back to where it was in October.

At the same time, Treasury yields in the bond market sank and the price of gold rose, which is typical when investors are herding into investments seen as safer.

The yield on the 10-year Treasury fell to 4.49% from 4.58%. Gold, which has been setting records, rose 2.4% to $2,430.50 per ounce.

Adding to the nervousness was a preliminary report suggesting sentiment among U.S. consumers is sinking. It's an important update because spending by U.S. consumers is the main engine of the economy.

Perhaps more worrisome was that U.S. consumers are getting more pessimistic about inflation. Their forecasts for inflation in the coming 12 months hit the highest level since December. Such expectations could ignite a self-fulfilling prophecy, where purchases meant to get ahead of higher prices only inflame inflation more.

That's why so much scrutiny is on corporate profits. While the downside of a remarkably resilient U.S. economy is a diminished chance of cuts to rates, the upside is that it should help prop up sales and earnings for businesses.

That's helped growth in profits to broaden out to more kinds of companies, rather than just the Big Tech behemoths that dominated the market last year, according to David Lefkowitz, head of U.S. equities at UBS Global Wealth Management.

Because of that, he's forecasting the S&P 500 can stay steady and rise to 5,200 by the end of the year, roughly where it closed Thursday. He says the index could maybe even rise to 5,500 if inflation pressures ease more quickly or corporate profit growth is stronger than expectations.

On Wall Street, Wells Fargo was flat after swinging between gains and losses. It beat analysts' profit targets for the latest quarter in its first report since the Biden administration eased some of the restrictions on the bank after a series of scandals.

Citigroup slipped 0.5% despite also reporting stronger-than-expected results, while State Street climbed 2.3%.

Banks are leading off a reporting season where analysts are forecasting companies in the S&P 500 to deliver a third straight quarter of growth, according to FactSet.