NEW YORK -- U.S. stocks sank Friday, extending the Standard & Poor's 500 index's worst two-day drop since June, amid disappointing results at JPMorgan Chase & Co. and signs hedge funds were dumping the bull market's best performers.
JPMorgan lost 3.7 percent as profit fell 19 percent on lower fixed-income trading and mortgage revenue. Teradata, Broadcom and Salesforce.com lost at least 3 percent as technology shares paced declines in the market after tumbling the most since 2012 yesterday. General Motors dropped 4.1 percent after a U.S. congressional panel released documents related to a recall probe of the company.
The S&P 500 fell 0.9 percent to 1,815.69, closing at its lowest level in two months. The gauge slipped 2.7 percent this week, the biggest loss since 2012. The Nasdaq Composite index dropped 1.3 percent Friday, capping its biggest two-day retreat since 2011, and the Dow Jones industrial average slid 143.47 points, or 0.9 percent, to 16,026.75. About 7.4 billion shares changed hands on U.S. exchanges, 5.8 percent higher than the three-month average.
"You need to shake out some of the speculative money and throw water on the irrational exuberance," Randy Frederick,
managing director of trading and derivatives at Charles Schwab, which manages $2.2 trillion in client assets, said in a phone interview. "It's a good reminder that markets don't go straight up. While the long-term is positive, we need to have these steps back along the way. We need this kind of pullback."
The S&P 500 declined 2.1 percent Thursday and the Nasdaq Composite slumped 3.1 percent, its biggest decline since November 2011. Technology shares slid Thursday as investors sold the biggest winners in the five-year market rally.
The percentage of hedge-fund bets that stocks will rise has decreased to 46 percent, compared with 2014's high of 58 percent, according to an April 9 research note from Credit Suisse Group. Net exposure in the U.S. declined to the lowest level since August 2012, the report said.
"So far, exposure reductions have been measured and at least for the time being, there has been no mass rush for the exits," Credit Suisse's Jon Kinderlerer wrote. "Unsurprisingly, we have seen exposure being trimmed the most in information technology where the popular longs have underperformed significantly over the last few weeks."
Companies with high levels of hedge-fund ownership have fallen about twice as much as the overall market. S&P 500 stocks that are most popular among the speculators have fallen 7.5 percent since April 2. The U.S. equity benchmark is down about 4 percent since then.
Hedge funds make up at least 30 percent of the shareholders in Allegion, Dollar General and Constellation Brands, the most among companies in the S&P 500. About 37 percent of Allegion shares are owned by hedge funds, the most among S&P 500 companies. The maker of security systems is almost 9 percent lower since April 2. H&R Block, the tax software provider, is down 11 percent and is about 27 percent owned by hedge funds.
The selloff that began last week was sparked by growing concern that valuations may be too high as earnings season begins. The Nasdaq Composite trades at 35 times reported earnings of the companies in the index. That's double the ratio for the S&P 500, which trades at about 17 times earnings.
Profit for members of the S&P 500 probably fell 0.9 percent in the first quarter, analysts now forecast, after anticipating a 6.6 percent rise in January. Sales increased 2.6 percent, according to projections.
Analysts have reduced earnings estimates more than they usually do over the last three months, according to Goldman Sachs Group strategists led by David Kostin. Average profit forecasts for S&P 500 companies fell about 4 percent in the first quarter, a percentage point more than normal, they wrote.
JPMorgan dropped 3.7 percent to $55.30 Friday, its biggest decline since November 2012. CEO Jamie Dimon warned investors in February that trading had fallen 15 percent for the first two months of 2014, a decline analysts blamed on a reduction in the Federal Reserve's bond purchases.
Wells Fargo & Co. rose 0.8 percent to $48.08. The most profitable U.S. bank in 2013 posted a 14 percent rise in earnings as fewer customers missed loan payments.
Alcoa unofficially started the earnings season on April 8 with profit that beat forecasts. About 54 companies in the S&P 500 are scheduled to report results next week, including Coca-Cola, Goldman Sachs Group, Yahoo, Google and General Electric.
Investors have added $5.4 billion to U.S. equity exchange-traded funds in the past five days and $732.3 million flowed into American bond ETFs, data compiled by Bloomberg show. Health-care stocks absorbed the most money among industry ETFs, taking in $511 million during the past week. Technology ETFs lost $1.1 billion in the past five days, the most of any sector in that period.
Traders exchanged more than 1.3 million contracts today on the PowerShares QQQ ETF, which tracks shares of the Nasdaq 100, according to data compiled by Bloomberg. That's almost twice the 20-day average volume for the fund. Bearish contracts expiring this month with a strike prices of $84 were the most traded at this time of day, Bloomberg data show.
The selloff that is sending shares in the Nasdaq 100 index to the wildest swings since Europe's debt crisis is failing to stir equal panic in option prices. During April, the Nasdaq 100 has moved 1.5 percent a day on average, the most since November 2011. At the same time, prices for options are below levels from February and October.
"They'll have to show a lot of pessimism before this decline is over," said Bruce Bittles, chief investment strategist at Milwaukee-based RW Baird & Co., which oversees $110 billion. "It certainly looks like this correction could carry on."
The Chicago Board Options Exchange volatility index, the gauge of S&P 500 options prices known as the VIX, rose 7.2 percent to 17.03. The CBOE NDX Volatility Index of Nasdaq 100 contracts climbed 10 percent to the highest since December 2012, adding to a 16 percent surge Thursday.
Across board decline
All 10 main industries in the S&P 500 declined Friday. Consumer-discretionary shares retreated 1.4 percent, leading losses. Gauges of raw material and technology stocks decreased 1.2 percent.
The Nasdaq 100 slipped 1.2 percent. The Nasdaq Biotechnology index fell 2.8 percent. The gauge entered a bear market Friday, sliding 21 percent since Feb. 25.
NewLink Genetics tumbled 11 percent to $19.97. The drugmaker has plunged 60 percent since closing at a record Feb. 25. Celldex Therapeutics dropped 10 percent to $14.02 and OncoMed Pharmaceuticals sank 10 percent to $24.12.
GM fell 4.1 percent to $31.93, the lowest level since June. Documents released by the House Energy and Commerce committee showed an engineer the automaker has put on leave approved a work-around in small-car models recalled this year for ignition defects that can deactivate air bags.
Herbalife, the nutritional supplement company that hedge fund manager Bill Ackman has accused of being a pyramid scheme, sank 14 percent to $51.48 for its biggest decline since 2012. Herbalife is being probed by the FBI, according to a person familiar with the matter. Authorities are looking into the company's marketing practices, said the person, who asked not to be identified because the investigation is private.