U.S. stocks declined on Monday as Treasury yields reached their highest levels since summer, and oil prices continued to rise. The S&P 500 fell by 1%, though it remains near its all-time high set a week prior. The Dow Jones Industrial Average dropped 398 points, or 0.9%, after hitting its own record, while the Nasdaq composite decreased by 1.2%. This marks a pause for U.S. stocks following a rally driven by relief that interest rates are expected to decrease, as the Federal Reserve shifts its focus to sustaining economic growth alongside controlling inflation. A strong U.S. jobs report on Friday boosted optimism about the economy and hopes for a smooth economic transition by the Fed. Goldman Sachs economist David Mericle reduced his recession probability estimate from 20% to 15% due to robust hiring figures.
However, the strength of the jobs report led traders to adjust their expectations for future Fed rate cuts, causing Treasury yields to rise, with the 10-year yield surpassing 4% for the first time since August. The two-year Treasury yield also briefly exceeded 4% on Monday, up from 3.50% just weeks ago—a significant shift in the bond market that can negatively impact stock prices and other investments.
As Treasury bonds offer higher interest rates and are considered very safe investments, investors may be less willing to pay high prices for riskier assets like stocks. Utility stocks experienced the steepest declines on Monday; these typically offer large dividends but become less attractive when bond interest rates increase.
Utilities experienced a 2.3% decline, marking the steepest drop among the 11 sectors of the S&P 500 index. Notably, Vistra fell by 5.2% and Duke Energy by 3.3%. This sector is less appealing to income-focused investors as the 10-year Treasury yield increased to 4.02%, up from 3.97% on Friday and 3.62% three weeks prior. The two-year Treasury yield, which aligns more closely with Federal Reserve expectations, rose to 3.99% from Friday's 3.92%.
Rising oil prices are also pushing Treasury yields higher due to concerns about potential disruptions in oil supply amid escalating Middle East tensions. Brent crude climbed by 3.7% to $80.93 per barrel, while U.S. benchmark crude also increased by 3.7%, reaching $77.14 per barrel.
Higher Treasury yields exert downward pressure on stocks perceived as overvalued, particularly Big Tech companies that have significantly contributed to the S&P 500’s recent gains but faced criticism for inflated valuations. On Monday, Apple dropped by 2.3%, Amazon by 3%, and Alphabet by 2.4%, weighing heavily on the index.
However, Nvidia bucked this trend with a rise of 2.3%, fueled by renewed enthusiasm for AI technology after Super Micro Computer announced a significant shipment of over 100,000 liquid-cooled graphics processing units, boosting its stock by 15.8%.
If Treasury yields continue to rise, companies may need to boost profits significantly to elevate their stock prices. This week marks the beginning of the latest corporate earnings season. Analysts, according to FactSet, predict a 4.2% growth in earnings per share for S&P 500 companies over the summer compared to last year, driven by technology and healthcare sectors. If accurate, this would mark the fifth consecutive quarter of growth. PepsiCo is set to release its quarterly results on Tuesday, with momentum building on Friday as JPMorgan Chase, Wells Fargo, and Bank of New York Mellon report their earnings, highlighting banks' dominance early in the season. Bank stocks showed mixed results on Monday; some extended gains from Friday after a robust jobs report suggested increased borrowing and loan repayments by customers.
Elsewhere on Wall Street, Duckhorn Portfolio's stock more than doubled after a private-equity firm announced plans to acquire it for approximately $1.95 billion in cash. Overall, the S&P 500 fell 55.13 points to 5,695.94; the Dow dropped 398.51 points to 41,954.24; and the Nasdaq decreased by 213.95 points to 17,923.90.
Internationally, European markets were mixed following larger gains in Asia. Japan’s Nikkei 225 index rose by 1.8% as the yen weakened against the U.S. dollar—a development that can enhance profits for Japanese exporters. Stock markets in mainland China will resume trading on Tuesday after a weeklong holiday; meanwhile, the government plans to detail its economic stimulus plans at a morning news conference in Beijing.