Stocks Fall Moderately on Rising T-Note Yields

What you need to know…

The S&P 500 Index ($SPX) (SPY) on Tuesday closed down -0.41%, the Dow Jones Industrials Index ($DOWI) (DIA) closed down -0.55%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed down -0.72%.

Stocks on Tuesday posted moderate losses, with the S&P 500, Dow Jones Industrials, and the Nasdaq 100 falling to 7-week lows.  Rising T-note yields weighed on the overall market after the 10-year T-note yield rose to a 2-1/2 month high of 3.351%.  Also, semiconductor stocks were under pressure Tuesday after monthly sales data from the Semiconductor Industry Association showed weakness in memory-related products in July. 

Tuesday’s U.S. economic news was hawkish for Fed policy and pushed T-note yields higher.  The Aug ISM services index unexpectedly rose +0.2 to a 4-month high of 56.9, stronger than expectations of a decline to 55.3.

Morgan Stanley Tuesday said they expect S&P 500 company earnings to fall 3% in 2023, even in the absence of a recession.  Also, Morgan Stanley said, “the next several quarters will end up containing some of the most significant downward revisions to forward EPS forecasts we have seen in the past several cycles.”  In addition, Morgan Stanley predicts “the lows for this bear market will likely arrive in Q4,” and the S&P 500 will fall to at least 3,400, about 13% below current levels, and could fall to 3,000 in the event of a recession.

Today’s stock movers…

Semiconductor chip stocks retreated Tuesday after monthly sales data from the Semiconductor Industry Association showed weakness in memory-related products in July with “below-seasonal sales across the board.”  As a result, Align Technology (ALGN) and Intel (INTC) closed down by more than -2%.  Also, Qualcomm (QCOM), Nvidia (NVDA), Microsoft (MSFT), Advance Micro Devices (AMD), Micron Technology (MU), Palo Alto Networks (PANW), Applied Materials (AMAT), NXP Semiconductors NV (NXPI), and Microchip Technology (MCHP) closed down more than -1%.

U.S.-listed Chinese stocks Tuesday fell back after China imposed lockdowns in more cities due to an increase of Covid cases, which will slow economic activity.  Pinduoduo (PDD) closed down more than -7% to lead losers in the Nasdaq 100.  Also, Alibaba Group Holding (BABA), JD.com (JD), and Baidu (BIDU) closed down by more than -3%. 

Homebuilders moved lower Tuesday after the 10-year T-note yield jumped to a 2-1/2 month high, which will push up mortgage rates and curb housing demand.  Lennar (LEN), DR Horton (DHI), and PulteGroup (PHM) closed down more than -1%.

Church & Dwight (CHD) closed down more than -3% Tuesday after the company lowered its full-year sales growth estimate to 2%-4%, down from a previous estimate of 4%-5%.

Rollins (ROL) closed up more than +6% Tuesday to lead gainers in the S&P 500 after RBC Capital Markets raised its recommendation on the stock to outperform from sector perform. 

Lululemon Athletica (LULU) closed up by more than +4% Tuesday to lead gainers in the Nasdaq 100 after Sealand Securities upgraded the stock to buy from add.

NextEra Energy (NEE) closed up more than +2% Tuesday after Morgan Stanley named the stock its top pick in the renewable energy sector.

Illumina (ILMN) closed up more than +2% Tuesday after the European Union voted against Illumina’s acquisition of Grail Inc, which makes a divestiture more likely.

Across the markets…

Dec 10-year T-notes (ZNZ22) on Tuesday closed down -1-2/32 points, and the 10-year T-note yield rose +14.1 bp to 3.330%.  Dec T-notes Tuesday dropped to a 2-1/2 month low, and the 10-year T-note yield rose to a 2-1/2 month high of 3.351%.  T-notes slumped Tuesday on supply pressures, with about 20 companies scheduling bond offerings totaling an estimated $30-$40 billion this week.  Bond dealers  may short T-note futures as a hedge until they distribute the new corporate supply.  T-notes Tuesday were also under pressure on negative carry-over from a surge in the 10-year UK gilt yield to an 8-1/2 year high of 3.138%. 

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