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US STOCKS-Wall Street drops on mixed earnings, jobless claims data

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* U.S. jobless claims post surprise increase

* Apple faces consumer protection probe -Axios

* Microsoft falls as cloud unit revenue growth slows

* Indexes fall: Dow 1.27%, S&P 1.30%, Nasdaq 2.42% (Updates to late afternoon, changes dateline, byline)

NEW YORK, July 23 (Reuters) - Wall Street retreated on Thursday as mixed earnings, a surprise increase in U.S. jobless claims and Washington’s tug-of-war over stimulus measures fed risk aversion among investors.

The sell-off steepened after Axios reported that Apple faces a multi-state consumer protection probe.

All three major U.S. stock averages were lower, with falling momentum stocks Apple Inc, Microsoft Corp and weighing heaviest.

“We keep seeing this push-pull rotation in and out of cyclicals and large cap names,” said Robert Pavlik, chief investment strategist, senior portfolio manager at SlateStone Wealth LLC in New York. “People believe that tech has had its run and is looking expensive.”

U.S. jobless claims unexpectedly ticked higher to 1.416 million last week, the Labor Department said.

The number excludes recipients of Pandemic Unemployment Assistance, set to expire on July 31.

Congress kept working to pass new stimulus before that deadline continued, with Senate Republicans announcing they could present their version of the bill to Democrats as early as this week.

Total U.S. coronavirus cases topped 4 million on Thursday, with nearly 2,600 new cases every hour, on average, according to a Reuters tally.

“There’s so much uncertainty about stimulus, the election, earnings, the racial landscape and geopolitical tensions,” Pavlik added. “And underlying everything is the uncertainty about COVID-19 and the re-opening process.”

The Dow Jones Industrial Average fell 343.25 points, or 1.27%, to 26,662.59, the S&P 500 lost 42.66 points, or 1.30%, to 3,233.36 and the Nasdaq Composite dropped 258.85 points, or 2.42%, to 10,447.28.

Of the 11 major sectors in the S&P 500, eight were in the red, with tech shares notching the largest percentage drop.

Second-quarter reporting season is in full-stride, with 113 S&P 500 constituents having reported. Refinitiv data shows that 77% of those have beaten expectations that were extraordinarily low. Analysts now see aggregate second-quarter S&P earnings plummeting by 40.8%, year-on-year, per Refinitiv

Microsoft Corp dropped 4.1% after reporting its cloud computing business Azure reported its first-ever quarterly growth under 50%.

Tesla Inc reported a profit for the fourth straight quarter, setting the company up for inclusion in the S&P 500. But the stock slid 6.0% as analysts questioned whether the electric automaker’s stock price matched its performance.

American Airlines Group Inc jumped 3.8% after announcing it would rethink the number of flights to add in August and September. Also, it reported an adjusted loss per share of $7.82.

Airlines, battered by mandated lockdowns, reversed early losses to cross well into the black. The S&P 1500 Airlines index was up 1.7%.

Twitter Inc rose 3.4% after reporting its highest-ever annual growth of daily users.

Declining issues outnumbered advancing ones on the NYSE by a 1.14-to-1 ratio; on Nasdaq, a 1.49-to-1 ratio favored decliners.

The S&P 500 posted 51 new 52-week highs and no new lows; the Nasdaq Composite recorded 100 new highs and 13 new lows. (Reporting by Stephen Culp; Editing by David Gregorio)