Stocks slump again. This time, it's retailers such as Target spooking investors

By David Gura

Published May 18, 2022 at 3:08 PM EDT

Traders work on the floor during the opening bell of the New York Stock Exchange in New York City on May 16. Stocks slumped on Wednesday as earnings from major retailers such as Target reinforced concerns about the U.S. economy.

Updated May 18, 2022 at 4:29 PM ET

The stock markets dropped again on Wednesday, extending their miserable run this year as earnings from retailers including Target and Walmart reinforced worries about the health of the U.S. economy.

The Dow Jones Industrial Average tumbled 1,164 points — its largest decline since June of 2020, while the S&P 500 fell by 4%. The Nasdaq sank by 4.7%.

The sharp declines were sparked by a warning from retailers that they have been facing higher costs and slowing sales, both of which have been eating into their profit margins.

They represented the latest in a series of corporate results and economic indicators showing how inflation is starting to dent the economy's prospects.

On Wednesday, Target said earnings fell for the first three months of the year compared to 2021. The company said it had been hit hard by supply chain issues and higher fuel costs, and although consumers continued to spend, they were buying fewer expensive items, like televisions.

Target said it's not raising prices but is absorbing the costs, even if they are hitting its bottom line.

"Throughout the quarter, we faced unexpectedly high costs, driven by a number of factors, resulting in profitability that came in well below our expectations, and well below where we expect to operate over time," Target Chairman and CEO Brian Cornell said in a statement accompanying the earnings report.

Target slumped by almost 25% for its worst performance in percentage terms since the 1987 stock crash.

Shoppers enter a Target store in Washington, D.C., on Feb. 17. Target said earnings fell in the first three months of the year as rising costs are eating into profits, among other factors.

Walmart is also under pressure

Price pressures also affected Walmart, the world's largest retailer, which reported earnings on Tuesday.

President and CEO Doug McMillon told Wall Street analysts on a conference call the company had to navigate a number of challenges in the first quarter of the year, including higher labor costs due to overstaffing and issues with inventory.

"We're not happy with the profit performance for the quarter, and we've taken action, especially in the latter part of the quarter, on cost negotiations, staffing levels, and pricing, while also managing our price gaps," McMillon said.

Walmart's stock is trading down for the second day in the row.

The earnings reports added more fuel to Wall Street's fears about higher prices, which have risen at their fastest pace in decades. That's raising concern the Federal Reserve won't be able to get high inflation under control without tipping the U.S. economy into a recession.

The Nasdaq, which is in bear market territory, is down almost 28 percent this year, and the Dow has fallen almost 14 percent. The S&P is off 18.2%.

The Fed has raised interest rates at its last two meetings, and Fed Chair Jerome Powell and his colleagues have signaled they will raise rates aggressively going forward.

The issue is that the effects of the higher rates won't be known for a while, keeping markets in a continued state of uncertainty.

"We're in a little bit of a holding pattern," says Kate Moore, the head of thematic strategy for global allocation at BlackRock. "We do think we are going to have to wait a little bit more time for better and more consistent economic data for the effects of higher rates and tighter monetary policy to feed through into the economy."