Stocks down on fears of smaller rate cut

Technology and health care companies drove U.S. stocks to a lower finish Monday as the market fell for a second straight day after a run of record highs.

The selling came amid growing speculation on Wall Street that an unexpectedly strong pickup in U.S. employment growth last month may keep the Federal Reserve from aggressively cutting its benchmark interest rate. Many investors still expect a cut of a quarter percentage point, but fewer are now expecting a half-point reduction.

The market rallied through much of June after the central bank signaled that it’s prepared to lower interest rates to offset slowing global growth and the fallout from U.S. trade conflicts. The benchmark S&P 500 index closed at record highs three days in a row last week before stumbling Friday after a report that showed that U.S. employers added a robust 224,000 jobs in June and stoked uncertainty about the Fed’s next move on interest rates.

“We’re getting an equity market that is taking a breather after five weeks of superb performance,” said Bill Northey, senior investment director at U.S. Bank Wealth Management. “And we’re on the eve of the beginning of second quarter earnings season, so it’s simply an equity market taking a breather between those events.”

The Fed’s benchmark interest rate currently stands in a range of 2.25 percent to 2.5 percent, and the central bank has not cut rates since the Great Recession in 2008. Last year, Fed officials raised rates four times, in part to stave off the risk of high inflation and in part to try to ensure that they would have room to cut rates if the economy stumbled.

On Friday, the Fed emphasized that it would act as necessary to sustain the economic expansion, while noting that most Fed officials have lowered their expectations for the course of rates. The Fed’s statement came in its semiannual report on monetary policy.

Investors will be listening closely for any hints on the central bank’s interest rate policy Wednesday and Thursday, when Fed Chairman Jay Powell delivers the Fed’s semiannual monetary report to Congress.

“Looking to the Fed funds futures markets, you see the potential for one to two more additional rate cuts between now and year end,” Northey said. “There’s a trajectory of easing that is likely to be forthcoming, that is already reflected in capital markets and not likely to change materially based on the testimony later this week.”

Besides keeping an eye on the Fed and on any developments with the ongoing trade talks between the U.S. and China, investors are looking ahead to the flood of earnings reports that companies are set to begin releasing later this month.

Expectations are generally low, and this could be the first time in three years that S&P 500 companies report a back-to-back decline in overall earnings, according to FactSet.