Stocks Falter as Higher Bond Yields Spark Long Liquidation

The S&P 500 Index ($SPX) (SPY) on Thursday closed down -0.28%, the Dow Jones Industrials Index ($DOWI) (DIA) closed down -0.52%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed down -0.15%.  December E-mini S&P futures (ESZ25) fell -0.30%, and December E-mini Nasdaq futures (NQZ25) fell -0.16%.

Stock indexes retreated on Thursday, with the Dow Jones Industrial Average posting a one-week low.  The S&P 500 fell from a new all-time high on Thursday as higher bond yields sparked long liquidation pressures in chipmakers and AI infrastructure stocks. The 10-year T-note yield rose by +2 bp to 4.14%.  However, Delta Air Lines rose more than +4% after raising its full-year adjusted EPS forecast. Also, PepsiCo rose more than +4% after reporting better-than-expected Q3 net revenue.  

Most stock indexes rallied to record highs this week on optimism that growth in the AI sector and spending on artificial intelligence will translate into corporate profits.  Stocks are also underpinned by hopes that a resilient US economy and additional Fed easing will continue to support the economy. 

Fed comments on Thursday were mixed for stocks.  On the bearish side, Fed Governor Michael Barr called for a cautious approach to further Fed rate cuts, saying there's a possibility that tariffs will create persistent inflation.  Conversely, New York Fed President John Williams stated that he would back "lower rates this year" if the economy evolved as expected, with inflation rising to around 3% and the unemployment rate increasing beyond its current 4.3%.  He added.  "There's more downside risks to the labor market and employment, and that is something that takes some of the upside risk off of inflation."

The shutdown of the US government is now into its second week, weighing on market sentiment and delaying key economic reports.  The government shutdown means delays in the release of government reports, including the last two weeks of weekly initial unemployment claims, Tuesday's Aug US trade report, and last Friday's monthly payroll report.  A prolonged shutdown could also delay the government's inflation data, scheduled for release on October 15.  The White House has warned that if the government shutdown lingered, it would trigger widespread dismissals of employees in government programs that don't align with President Trump's priorities.  Bloomberg Economics estimates that 640,000 federal workers will be furloughed during the shutdown, which would expand jobless claims and push the unemployment rate up to 4.7%.

The ongoing US government shutdown, expectations of additional Fed easing, President Trump's criticism of the Fed, and political uncertainty in France and Japan are all driving investors to safe-haven assets, such as gold and Bitcoin.  Gold prices soared above $4,000 an ounce to another record high on Wednesday. 

Market focus this week will be on any new developments regarding tariffs, trade, or attempts by lawmakers to end the ongoing US government shutdown.  On Friday, the University of Michigan Oct consumer sentiment index is expected to fall -1.1 to 54.0.

Rising corporate earnings expectations are a bullish backdrop for stocks.  According to Bloomberg Intelligence, more than 22% of companies in the S&P 500 provided guidance for their Q3 earnings results that are expected to beat analysts' expectations, the highest in a year.  However, Q3 profits are expected to have risen by +7.2%, the smallest increase in two years.  Also, Q3 sales growth is projected to slow to +5.9% from 6.4% in Q2. 

The markets are pricing in a 95% chance of a -25 bp rate cut at the next FOMC meeting on Oct 28-29. 

Overseas stock markets on Thursday settled mixed.  The Euro Stoxx 50 closed down -0.43%.  China's Shanghai Composite reopened from the week-long Lunar New Year holiday and rallied to a 10-year high and closed up +1.32%.  Japan's Nikkei Stock 225 climbed to a new record high and closed up +1.77%.

Interest Rates

December 10-year T-notes (ZNZ5) on Thursday closed down by -4 ticks.  The 10-year T-note yield rose +2.7 bp to 4.144%.  T-note prices moved lower Thursday due to rising inflation expectations after the 10-year breakeven inflation rate climbed to a 1-week high of 2.374%. Also, hawkish comments from Fed Governor Michael Barr weighed on T-note when he called for a cautious approach to further Fed rate cuts.

Losses in T-notes were limited by decent demand for the Treasury's $22 billion 30-year T-bond auction that had a bid-to-cover ratio of 2.38, right on the 10-auction average.  Also, dovish comments from New York Fed President John Williams were supportive for T-notes when he said that he would support "lower rates this year" if the economy evolves as expected. 

T-notes also have support amid concerns about the ongoing US government shutdown, which could lead to additional job losses, reduced consumer spending, and a weakened US economy, potentially allowing the Fed to continue cutting interest rates.  

European government bond yields moved higher on Thursday.  The 10-year German bund yield rose +2.4 bp at 2.703%. The 10-year UK gilt yield rose by +3.6 bp to 4.745%.

German trade news was weaker than expected as Aug exports unexpectedly fell -0.5% m/m, weaker than expectations of +0.2% m/m.  Also, Aug imports fell -1.3% m/m, weaker than expectations of -0.5% m/m.

The account of the ECB's September 10-11 meeting was slightly hawkish as policymakers decided against an interest rate cut amid upside inflation risks, saying "While a further rate cut in the coming months would better protect the inflation target both under the baseline and across a range of adverse scenarios, the materialization of upside risks would instead warrant maintaining the current level of the policy rate."

Swaps are discounting a 1% chance for a -25 bp rate cut by the ECB at its next policy meeting on October 30.

US Stock Movers

Most semiconductor manufacturers and AI infrastructure stocks declined on Thursday, weighing on the broader market.  Dell Technologies (DELL) closed down more than -5% to lead losers in the S&P 500.  Also, Micron Technology (MU) and Marvell Technology (MRVL) closed down more than -2%.  In addition, GlobalFoundries (GFS), Qualcomm (QCOM), Microchip Technology (MCHP), NXP Semiconductors NV (NXPI), Lam Research (LRCX), ON Semiconductor (ON), and Texas Instruments (TXN) closed down more than -1%.

PulteGroup (PHM) closed down more than -4% and Toll Brothers (TOL) closed down more than -3% to lead homebuilders lower after CFRA downgraded them to sell from hold.  Also, DR Horton (DHI) closed down more than -4% and Lennar (LEN) closed down more than -1%. 

Energy producers and energy service providers fell on Thursday after the price of WTI crude oil dropped more than -1%.  As a result, APA Corp (APA) and Diamondback Energy (FANG) closed down more than -3%.  Also, Haliburton (HAL) closed down more than -2%, and ConocoPhillips (COP), Devon Energy (DVN), Chevron (CVX), and Occidental Petroleum (OXY) closed down more than -1%. 

Helen of Troy (HELE) closed down more than -24% after reporting Q2 gross margin of 44.2%, below the consensus of 46.6%. 

AZZ Inc (AZZ) closed down more than -4% after reporting Q2 sales of $417.3 million, below the consensus of $425.5 million. 

Sonoco Products (SON) closed down more than -4% after Bank of America Global Research downgraded the stock to neutral from buy.

Graphic Packaging Holding (GPK) closed down more than -3% after Bank of America Global Research downgraded the stock to neutral from buy.

Albemarle (ALB) closed up more than +5% to lead gainers in the S&P 500 after TD Cowen raised its price target on the stock to $85 from $70. 

Delta Air Lines (DAL) closed up more than +4% after it raised its full-year adjusted EPS forecast to about $6.00 from a previous estimate of $5.25-$6.25.  Also, United Airlines Holdings (UAL) closed up more than +3% on the news.

Rare earth stocks rallied on Thursday after China unveiled new restrictions on rare earth exports.  As a result, Critical Metals (CRML) closed up more than +25%, Ramaco Resources (METC) closed up more than +12%, and MP Materials (MP) closed up more than +2%. 

Serve Robotics (SERV) closed up more than +29% after DoorDash added the company as an autonomous delivery partner.

Akero Therapeutics (AKRO) closed up more than +16% after Novo Nordisk agreed to buy the company for about $4.7 billion, or $54 per share. 

MercadoLibre (MELI) closed up more than +4% to lead gainers in the Nasdaq 100 after saying it was in talks with Brazilian regulators as part of its push to allow pharmacies to sell medications on the company's local marketplace.

PepsiCo (PEP) closed up more than +4% after reporting Q3 net revenue of $23.94 billion, better than the consensus of $23.85 billion. 

Costco Wholesale (COST) closed up more than +3% after reporting that its September total comparable sales rose +5.7%, stronger than the consensus of +4.6%.

Earnings Reports(10/10/2025)

Compass Diversified Holdings (CODI), Hingham Institution For Saving (HIFS), Immersion Corp (IMMR), Mercurity Fintech Holding Inc (MFH), Nurix Therapeutics Inc (NRIX), Triller Group Inc (ILLR), Unity Bancorp Inc (UNTY), XCF Global Inc (SAFX).