NEW YORK (AP) — U.S. stocks fell Monday after rising bond market yields driven by a strong U.S. economy increased pressure on Wall Street.
The S&P 500 fell 1.2%, following last week’s 1.6% loss, its worst since October. The Dow Jones Industrial Average fell 248 points, or 0.7%, and the Nasdaq composite fell 1.8%.
Stocks were up sharply earlier in the day as oil prices fell on hopes that international efforts to calm escalating tensions in the Middle East might help. But Treasury yields also rose following the latest report on the U.S. economy, beating expectations.
The economy and financial markets are in a delicate phase where such strength raises hopes of corporate profit growth, but also harms prospects for interest rate easing by the Federal Reserve. These are the two main levers that set stock prices, and they simultaneously pull Wall Street in different directions.
Traders want lower interest rates, which could provide a boost to the broader economy, and much of the U.S. stock market’s recent record highs are based on expectations of declines.
But strong reports like Monday’s, which showed U.S. shoppers increased their spending at retailers last month more than expected, are leading retailers to expect only one or two rate reductions this year, according to data from the CME group. That’s down from expectations of six or more reductions earlier this year. Some traders expect there to be no reduction as inflation and the broader economy have remained stubbornly above forecasts this year.
High interest rates and bond yields hurt the prices of all types of investments, especially those that appear expensive or those that compete for the same types of investors as bonds.
As a result, real estate investment trusts posted the biggest losses in the stock market on Monday. When bonds offer higher yields, they drive away investors who might otherwise be interested in the relatively large dividends that real estate stocks pay. High rates can also put general pressure on property prices.
Office owner Boston Properties, for example, fell 3.2%.
More influential was the weakness in stocks of big tech companies. Apple fell 2.2%, Nvidia fell 2.5% and Microsoft fell 2%. They have already benefited from low interest rates and often feel pressure when yields rise. Because they are also the largest stocks on Wall Street, their movements carry extra weight on the S&P 500 and other indexes.
Microsoft, for example, swung from an initial 1.2% gain to a loss in the afternoon and was the second largest force weighing on the S&P 500.
Some financial companies helped contain losses by announcing encouraging profits for the start of the year. There is pressure on businesses as a whole to generate higher profits as interest rates appear far less likely to provide near-term support.
Goldman Sachs rose 2.9% following its report.
M&T Bank rose 4.7% after reporting first-quarter profit that slightly beat analysts’ expectations. He also said it slightly reduced the level of pain that would result if the stressed commercial real estate sector took a big hit.
Charles Schwab rose 1.7% after also beating analysts’ forecasts for its profit last quarter.
Overall, the S&P 500 fell 61.59 points to 5,061.82. The Dow Jones fell 248.13 to 37,735.11 and the Nasdaq composite fell 290.08 to 15,885.02.
In the oil market, a barrel of U.S. crude for delivery in May fell 25 cents to $85.41 as political leaders urged Israel not to retaliate after Saturday’s Iranian attack involving hundreds of drones, missiles ballistic and cruise missiles. Brent crude, the international standard, lost 35 cents to $90.10 a barrel.
Financial markets were nervous heading into the weekend. The worry was that an Iranian attack could widen the war between Israel and Hamas and ultimately restrict the flow of crude oil. But Israel said 99% of the drones and missiles had been intercepted, as diplomats called for de-escalation and the U.S. administration made clear it did not support a broader war with Iran.
Rising oil prices this year have sparked concerns about their impact on inflation, which remains stubbornly high. After cooling significantly last year, inflation has consistently been higher than forecast every month so far through 2024.
“If inflation persists due to dynamics in the economy, that is not necessarily bad for stocks,” Bank of America strategists led by Ohsung Kwon wrote in a BofA Global Research report. “But stagflation is,” referring to the painful combination of a stagnant economy and high inflation.
Wells Fargo Investment Institute strategists raised their forecasts for when the S&P 500 will end this year, in part because of the surprising strength of the U.S. economy. While they expect stock prices to be volatile after strong gains since October, they say growth in the U.S. economy should boost corporate sales.
On the bond market, the yield on 10-year Treasury bills rose from 4.52% Friday evening to 4.61%.
