NEW YORK — Not even a strong string of earnings reports could stave off investor worries about debt on Monday.
Europe's banking troubles and an impasse over lifting the U.S. government's borrowing limit helped drag down stock markets in the U.S. and Europe. The worries also sent gold prices to a record, without accounting for inflation.
The Dow Jones industrial average fell 171 points, or 1.4 percent, to 12,309. The S&P 500 index dropped 18 points, also 1.4 percent, to 1,298. The Nasdaq composite fell 44 points, or 1.5 percent, to 2,746. French and German stock markets closed down more than 1.6 percent.
The results of stress tests on European banks released Friday failed to reassure investors. Eight banks failed the test to measure who they would measure handle even small financial strains. But the tests didn't take into account how banks would handle a default by Greece or Italy, says Dan Greenhaus, chief global strategist at BTIG. Those two countries matter the most. Greece and Italy are among the countries most at risk of debt default.
Italy not only is Europe's third largest economy, but also possesses the world's third-largest bond market at 1.8 trillion euro ($2.5 trillion). "So far European officials have failed to stabilize a country as small as Greece," Greenhaus said. "So we have little reason to have faith they'll fix a country as big as Italy."
In the U.S., the debt limit debate is at a standstill in Washington. The Treasury Department says the limit must be raised by Aug. 2 or the government risks defaulting on its debt. But a deal must likely be reached sooner than that, possibly as early as Friday, to have legislation ready for President Barack Obama to sign by Aug. 2. Rating agencies warned last week that the impasse puts the country's top AAA credit rating grade at risk.
The continued delay in reaching a deal is beginning to impact broader markets, sparking a selloff, investors say.
U.S. bank stocks fell sharply. Bank of America declined 4 percent, to $9.55. It is the only major bank trading in the single digits. Bank of America, which recently announced an $8.5 billion settlement with a group of mortgage bond investors, reports earnings Tuesday.
Gold is higher for the tenth day in a row, jumping 1 percent to $1,602 an ounce. Its price has been rising steadily since the start of the month, as countries considered at risk of default expanded beyond Greece to include Italy and the U.S. Investors have sought safety in gold as a protection against turbulence in currencies such as the dollar.
Newspaper publisher Gannett Co., oil-field services company Halliburton Co. and discount brokerage Charles Schwab Corp. all reported higher earnings. But their stocks all dropped along with the broader market.
Hasbro Inc. fell 3 percent. The toy maker's income fell short of Wall Street's estimates despite stronger sales of Transformers action figures and other products.
It's the start of a crowded week for earnings reports. More than 100 of the companies that make up the S&P 500 index are set to release second-quarter results, including the major banks, Apple Inc., Johnson & Johnson and General Electric Co. IBM Corp. reports after the close of trading Monday.