Shares in US retailer Target plunge 25% on inflation fears

A mild US recession for the end of 2022 and early 2023 is now the base case for Wells Fargo Investment Institute's economic expectations.

The Nasdaq and the S&P 500 dropped 3% as a rally in growth shares faded amid economic growth concerns, while Target plunged to the bottom of the S&P 500 after the retailer became the latest victim of surging prices.

Target's first-quarter profit halved and the company warned of a bigger margin hit on rising fuel and freight costs. Its shares fell 25% at one stage and were tracking their worst day since the Black Monday crash on October 19, 1987.

The retailer's results come a day after rival Walmart trimmed its profit forecast. 

All of the 11 major S&P sectors declined, with consumer discretionary and technology stocks down 5.7% and 3.5%, respectively.

Rising inflation, the conflict in Ukraine, prolonged supply-chain snarls, pandemic-related lockdowns in China, and prospects of aggressive policy tightening by central banks have weighed on the markets recently, stoking concerns about a global economic slowdown.

Wells Fargo Investment Institute adjusted its economic expectations to make a mild US recession its base case for the end of 2022 and early 2023 based on economic data. US Federal Reserve chairman Jerome Powell had vowed this week that the US central bank will raise rates as high as needed to kill a surge in inflation. 

Traders are pricing in 50 basis point interest rate hikes by the Fed in June and July. 

"A portion of the market is definitely focusing on a potential growth slowdown," said Zachary Hill, head of portfolio management at Horizon Investments.

The Fed is dead set on tightening financial conditions, and that means lower equity valuations and wider credit spreads."

The S&P 500 is down almost 17% so far in 2022 and the Nasdaq has fallen more than 26%, hit by growth stocks. 

Valuations for stocks as measured by the forward price-to-earnings ratio have come down sharply in recent weeks and that has increased the appeal of shares for some investors.

Reuters