Stocks fall on Thursday with the S&P 500 on track to close out worst first half in decades

Stocks fell sharply Thursday, as the S&P 500 caps off its worst first half in more than 50 years.

The Dow Jones Industrial Average shed 404 points, or 1.3%. The S&P 500 slid 1.5%, and the Nasdaq Composite pulled back by 2%.

Home retail stocks led the market lower after the high-end furniture chain RH saw shares drop about 9%, after it issued a profit warning for the full year. Wayfair and Williams-Sonoma followed them lower by 6% and 7%, respectively.

"The combination of slowing growth, fading EPS prospects, and ongoing monetary tightening has been weighing on equity sentiment for months and is causing consternation again this morning," wrote Adam Crisafulli of Vital Knowledge.

Cruise stocks continued to drag after Morgan Stanley cut its price target on Carnival roughly in half Wednesday and said it could potentially go to zero. Carnival shares were down 6% Thursday along with Royal Caribbean. Norwegian Cruise Line fell 7%.

Thursday marked the final day of the second quarter. The Dow and S&P 500 are on track for their worst three-month period since the first quarter of 2020 when Covid lockdowns sent stocks tumbling. The tech-heavy Nasdaq Composite is down more than 20% over the last three months, its worst stretch since 2008.

The S&P 500 is also on track for its worst first half of the year since 1962, which has been dominated by myriad factors pressuring markets. Those include surging inflation, Federal Reserve rate hikes, Russia's ongoing war on Ukraine and Covid-19 lockdowns in China – all of which have helped fuel fears of a coming global recession.

A surge in bond yields earlier in the year and historically pricey equity valuations sent tech stocks tumbling first, as investors rotated out of growth-oriented areas of the market. Rising rates makes future profits — like those promised by growth companies — less attractive.

The tech-heavy Nasdaq has been hit especially hard this year. The index is now more than 30% below its Nov. 22 all-time high. Some of the largest technology companies have registered sizeable declines this year, with Netflix down 70%. Apple and Alphabet have each lost roughly 22%, while Facebook-parent Meta has slid 51%.

Inflation and the economy

The core personal consumption expenditures price index, the Fed's preferred inflation measure, rose 4.7% in May, the Commerce Department reported Thursday. That's 0.2 percentage points less than the month before, but still around levels last seen in the 1980s. The index was expected to show a year-over-year increase of 4.8% for May, according to Dow Jones.

The Chicago PMI, which tracks business activity in the region, came in at 56, slightly below a StreetAccount estimate of 58.3.

The Federal Reserve has taken aggressive action to try and bring down rampant inflation, which has surged to a 40-year high.

Federal Reserve Bank of Cleveland President Loretta Mester told CNBC that she supports a 75 basis point hike at the central bank's upcoming July meeting if current economic conditions persist. Earlier in June, the Fed raised its benchmark interest rate by three-quarters of a percentage point, which was the largest increase since 1994.

Some Wall Street watchers are worried that too-aggressive action will tip the economy into a recession.

"We do not believe the stock market has bottomed yet and we see further downside ahead. Investors should be holding elevated levels of cash right now," said George Ball, chairman of Sanders Morris Harris.

"We see the S&P 500 bottoming at around 3,100, as the Federal Reserve's aggressive, but necessary inflation-fighting measures are likely to depress corporate earnings and push stocks lower," he added.