Stocks fall, Treasury yields jump as investors face hawkish Fed

U.S. stocks fell early in the week, extending a selloff that began on Friday after Fed Chairman Jerome Powell’s hawkish remarks at the central bank rally in Jackson Hole.

The S&P 500 fell 0.8%, while the Dow Jones Industrial Average lost 220 points, or 0.7%. The tech-heavy Nasdaq Composite was down 1.2%.

Meanwhile, in the bond market, the benchmark 10-year Treasury jumped above 3.1%, and the 2-year Treasury yield hit 3.4%, hitting its highest level since. 2007 early Monday.

The moves come after the Nasdaq plunged 3.9% on Friday and the S&P 500 fell 3.3%, with both indexes posting their biggest one-day declines since June 13. The Dow Jones erased 1,000 points during the session, or about 3%.

“Chair Powell’s speech was a good reminder that 2-year Treasury yields are more important to equity markets than the FOMC moving 50 or 75 basis points in upcoming meetings,” Nicholas said. DataTrek’s Colas in a Monday note, noting that large US cap stocks have been sensitive to the 2-year benchmark.

The jump in 2-year yields from 2.28% to 3.45% in mid-June was what sent stock valuations crashing, with the S&P hitting its June 16 low after yields peaked on June 14 at 3.45%, Colas said. And once 2-year yields stabilized near 3%, the S&P 500 rebounded 17% through August 16.

Federal Reserve Chairman Jerome Powell walks with Fed Vice Chairman Lael Brainard and New York Fed Chairman John Williams during a break at the annual Economic Policy Symposium of the Kansas City Fed in Jackson Hole, Wyoming, U.S. August 26, 2022. REUTERS/Ann Saphir

The biggest risk to equities is weak earnings, according to Morgan Stanley’s Mike Wilson, who noted that while the first half of the year was driven by Federal Reserve policy and tighter financial conditions, the second half will be determined by profit forecasts for the next year.

“As a result, equity investors should focus on this risk, not the Fed, especially as we enter the seasonally weakest period of the year for earnings revisions, and inflation eats away at margins and demand more,” Wilson said.

Tracie McMillion, head of global asset allocation strategy at Wells Fargo, affirmed a similar view in an interview with Yahoo Finance Live on Friday.

“What we heard today is that the growth is too strong,” McMillion said. “What this means for earnings is that we will likely have to see reductions in earnings guidance for the third and fourth quarters.”

Earnings season is winding down, but earnings from several headliners remain within reach for investors this week, including Best Buy (BBY), HP (HPQ), Big Lots (BIG), Chewy (CHWY), Lululemon Athletica (LULU), and Broadcom (AVGO).

Alexandra Semenova is a reporter for Yahoo Finance. Follow her on Twitter @alexandraandnyc

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