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A trade-in for iPhone XR promotion board is displayed as an Apple employee waits for customers at its retail store in Beijing, on Thursday, Jan. 3, 2019.Andy Wong/AP Photo/Andy Wong

Financial markets signalled a darker outlook for U.S. corporate profits and economic activity after Apple Inc. slashed its fourth-quarter revenue forecast, citing lower iPhone sales in China.

The S&P 500 fell 2.5 per cent on Thursday, making the first two trading days of 2019 the worst start for U.S. equities since 2000. The bond market is also reflecting a shift in sentiment toward an economic slowdown this year.

“Everything points to a general weakening in corporate earnings growth going forward and that’s raising a lot of angst among investors, and it is contributing to the problems in the stock market,” said Mark Zandi, chief economist at Moody’s Analytics.

Investors are also rethinking their view of interest rates. The U.S. two-year Treasury note yield dropped below 2.4 per cent, reaching parity with the federal funds effective rate for the first time since 2008. The market move suggests investors believe the U.S. Federal Reserve will not be able to continue to tighten monetary policy as its forecast suggests, after having lifted benchmark interest rates four times in 2018.

The yield on the 10-year U.S. Treasury bond slipped to 2.56 per cent, hitting its lowest level in a year.

“At its December meeting the Fed emphasized that its monetary policy was based on a plurality of indicators, not just on stock market movements. Since then, however, economic indicators seem to have confirmed the markets prognosis for a growth slowdown, leaving the Fed less leeway to hike rates further,” Jocelyn Paquet, an economist at National Bank Financial, said in a note.

Apple, which last year became the first public company to top US$1-trillion in market value, slumped 9.9 per cent, erasing US$74-billion in value and bringing its total decline since October to 38.7 per cent. Thursday’s decline, Apple’s biggest one-day setback in five years, dragged other stocks down as well.

On Wednesday after markets closed, the California-based technology company said its first-quarter revenue would be US$84-billion, down from an earlier forecast of US$89-billion to US$93-billion, adding to the list of U.S. multinationals that have been lowering their expectations.

Delta Air Lines Inc. said on Thursday that its fourth-quarter unit revenue (or average revenue per seat mile) would rise 3 per cent from last year, down from a forecast of 3.5 per cent previously. Delta shares fell 8.9 per cent, and weighed on other airline stocks.

FedEx Corp. lowered its profit forecast in December, pointing to the impact of trade tensions between China and the United States. Starbucks Corp. said recently that sales growth in China could slow to just 1 per cent, lagging sales growth elsewhere. And Tiffany & Co. said that Chinese consumers were cutting back on spending overseas.

These downward adjustments are hardly catastrophic, but they support the idea that U.S. corporate profit growth is slowing as companies prepare to release financial results over the next several weeks. As profit growth slows, stock valuations tend to drop.

According to the latest estimates from Bloomberg, analysts expect that S&P 500 fourth-quarter profits will rise 13.4 per cent, year-over-year, but that’s down from expectations of 18-per-cent profit growth in October. Similarly, analysts expect first-quarter profits will rise just 4.3 per cent, down from a forecast of 7.5 per cent in October.

David Rosenberg, chief economist and strategist at Gluskin Sheff + Associates, noted that the darkening outlook for earnings suggests that stock valuations can decline considerably more. "Even a flat earnings backdrop can take this market down to 1,800 on the S&P 500, or even lower,” Mr. Rosenberg said in a note, implying that the index could fall another 26.5 per cent from its current level of 2,448.

The latest U.S. economic news didn’t brighten the outlook and suggested that economic challenges are not confined to China. The ISM manufacturing index fell to 54.1 in December, down from 59.3, marking its biggest monthly decline in a decade.

“Manufacturing may account for only a small share of the overall economy but, with clear evidence that weaker global growth is starting to take its toll and with financial conditions continuing to tighten, there is a risk that the slowdown in the factory sector could mark the start of a more serious downturn in the wider economy,” Andrew Hunter, senior U.S. economist at Capital Economics, said in a note.

Canadian bond yields are also anticipating that the Bank of Canada will avoid raising rates any time soon. The yield on the five-year Government of Canada bond, which influences fixed mortgage rates, fell below 1.76 per cent. That marked the yield’s lowest level in more than a year, and down from 2.5 per cent in October, when the economic outlook was noticeably sunnier.

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