Dow Plunges Nearly 600 Points As Soaring T-Bill Yields Lead To Massive Selling In Tech Stocks

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Top line

Tech stocks sold off on Tuesday as inflation and economic growth expectations, supported by strong spending measures in Congress, caused 10-year Treasury yields to rise staggeringly, reducing high stock valuations .

Highlights

The Dow Jones Industrial Average fell 570 points, or 1.6%, to 34,299 on Tuesday, while the S&P 500 fell 2%, placing each index about 3.5% below their all-time highs of this summer.

Led by sharp declines in chipmakers ASML, Applied Materials and AMD, the high-tech Nasdaq plunged 2.8% to 14,546 points, more than 5% below its last high earlier this month.

Yields on 10-year Treasuries climbed 3.5 basis points on Tuesday to their highest levels in more than three months, ushering in the tech-driven sell off by pulling investors away from the high-priced sector, said Market analyst Tom Essaye, president of Sevens Report Research, said in a note.

In the S&P, e-commerce company Etsy, vaccine maker Moderna and software company ServiceNow were among the leading stocks in the losses, each falling about 6%.

Meanwhile, U.S. consumer confidence unexpectedly fell to a seven-month low this month, according to data released Tuesday by the Conference Board, which noted that the delta variant spread continued to slow down. ‘optimism.

Crucial quote

“There is a lot of drama on Wall Street, and most of it is linked to a reset in inflation expectations,” Oanda analyst Edward Moya wrote in a Tuesday note. “This surge in Treasury yields is kryptonite for the Nasdaq and will ultimately lower growth forecasts.”

Key context

The rise in Treasury yields coincided with several bouts of stress in the markets this year. In a morning note, Vital Knowledge Media analyst Adam Crisafulli pointed out that yields, still around 50% below pre-pandemic levels, are normalizing and increasing mainly for “good reasons”, namely expectations. stronger economic growth. However, this resurgence should prove difficult for tech stocks, which have the most to lose after the Nasdaq’s astonishing 43% gain last year. “The pandemic has fueled a huge surge in technology stocks,” he said, adding that as the pandemic wears off, the forces that raised stocks “are working backwards.” Growth fueled by the pandemic has already started to slow for tech companies, jeopardizing their future earnings prospects, and rising yields are only expected to further erode stock prices, Crisafulli notes.

What to watch out for

In a recent memo, Morgan Stanley analysts estimated that the S&P 500 could take an average 18% discount to earnings for every 100 basis point increase in 10-year Treasury yields. Since the start of the year, yields have increased by around 60 basis points. The stocks most at risk of the downside include Zoom Video Communications, the exercise equipment company Peloton and Tesla, which stays at home, Morgan Stanley said.

Chief critic

“Consumer confidence fell in September as the spread of the delta variant continued to dampen optimism,” Lynn Franco, senior director of the Conference Board, said Tuesday. “Concerns about the state of the economy and near-term growth prospects have intensified, while spending intentions on homes, automobiles and major appliances retreated again.

Further reading

White House warns US could slide into recession if it hits debt ceiling next month (TSTIME)

Stocks rally after Fed sticks to $ 120 billion monthly stimulus (TSTIME)

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