Stocks Settle Lower as Bond Yields Surge

The S&P 500 Index ($SPX) (SPY) closed down by -0.71% on Tuesday, the Dow Jones Industrial Average ($DOWI) (DIA) closed down by -0.79%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed down by -1.29%.  E-mini S&P futures (ESU26) fell -0.71%, and September E-mini Nasdaq futures (NQU26) fell -1.25%.

Stock indices retreated on Tuesday, with the S&P 500 falling to a 4-week low, the Dow Jones Industrials sliding to a 1-month low, and the Nasdaq 100 posting a 1-week low.   Stocks fell as surging oil prices boosted inflation expectations and bond yields and ramped up expectations that global central banks will keep raising interest rates.  Investors are demanding higher yields to hold bonds as concerns intensify over persistent inflation, government spending, and surging corporate borrowing to finance the AI buildout.  The higher bond yields sparked a retreat in chipmakers and AI-infrastructure stocks on Tuesday.

Tuesday’s global bond sell-off pushed bond yields to multi-year highs and undercut stocks.  The UK 10-year Gilt yield soared to an 18-year high of 5.25%, the German 10-year Bund yield jumped to a 15-year high of 3.36%, the Japanese 10-year JGB bond yield surged to a 30-year high of 3.00%, and the 10-year T-note yield rose to a 1.75-year high of 4.80%. 

Stocks maintained their losses on Tuesday amid weaker-than-expected US economic news, including Aug ISM manufacturing, July construction spending, and July JOLTS job openings.

The US Aug ISM manufacturing index fell -1.0 to 54.6, weaker than expectations of 55.2.  The Aug ISM prices paid sub-index was unchanged at 71.1, stronger than expectations of a decline to 70.8.

US July construction spending fell by -0.5% m/m, weaker than expectations of no change.

The US July JOLTS job openings unexpectedly rose +89,000 to 7.271 million from a downward-revised 7.182 million in June, weaker than expectations of 7.313 million.

Hawkish comments on Tuesday from Fed Governor Michael Barr were bearish for stocks and bonds when he said, "If inflation appears not to be moderating sufficiently, then I think we should act decisively to raise interest rates."

Oct WTI crude oil prices (CLV26) surged more than +5% on Tuesday to a 6-week high as Middle East hostilities escalated. Late Monday, two oil supertankers were struck by projectiles while attempting to exit the Strait of Hormuz.  Also on Monday, the US struck Iranian rocket launchers preparing to send mines into the Strait of Hormuz, and Iran retaliated by firing missiles and drones at US air bases in Jordan, while the United Arab Emirates said it intercepted drones from Iran. 

Crude prices raced to their highs Tuesday afternoon when the US launched a fresh wave of strikes against targets in Iran in retaliation for Iran trying to put mines in the Strait of Hormuz and for earlier strikes on a US military base in Jordan.  Iran said it retaliated with a “decisive operation” against US bases in the Middle East.

Q2 earnings results are a bullish factor for stocks.  The S&P 500 is tracking for earnings growth of almost 32% in Q2, well above projections of +23%, and nearly four times the average earnings growth rate outside of the Covid period since Q4 of 2013, according to Bloomberg Intelligence.  AI spending is expected to account for most of earnings, with AI infrastructure stocks set to contribute nearly 60% of the S&P 500's earnings-per-share growth in Q2. So far, earnings results have been positive, with 86% of the 487 S&P 500 companies that have reported Q2 earnings beating estimates, according to Bloomberg data. 

The markets are discounting a 69% chance of a +25 bp rate hike at the next FOMC meeting on September 15-16.

Overseas stock markets settled lower on Tuesday.  The Euro Stoxx 50 fell to a 1-month low and closed down -0.80%.  China's Shanghai Composite fell from a 7-week high and closed down -0.16%.  Japan's Nikkei-225 Stock Average closed down -0.15%.

Interest Rates

December 10-year T-notes (ZNZ6) closed down by -9 ticks on Tuesday.  The 10-year T-note yield rose +4.2 bp to 4.792%.  T-notes dropped to a 1.75-year nearest-futures low on Tuesday, and the 10-year T-note yield rose to a 1.75-year high of 4.798%.  T-notes were under pressure from Tuesday’s +5% surge in WTI crude oil prices to a 6-week high, which boosted inflation expectations and is hawkish for Fed policy. The 10-year breakeven inflation rate rose to a 1.5-week high of 2.360% on Tuesday.  T-notes are also being pressured by negative carryover from last Friday, when hawkish comments from Fed Chair Warsh pushed the chances of a Fed rate hike at next month’s FOMC meeting up to 69% on Tuesday from 36% before he spoke. 

Losses in T-notes were limited on Tuesday amid weaker-than-expected US economic news on Aug ISM manufacturing, July construction spending, and July JOLTS job openings that sparked some short covering in T-notes.

European government bond yields moved higher on Tuesday.  The 10-year German bund yield rose to a 15-year high of 3.364% and finished up +2.0 bp to 3.344%.  The 10-year UK gilt yield surged to an 18-year high of 5.250% and finished up +15.7 bp to 5.220%.

The Eurozone Aug CPI rose +3.3% y/y, in line with expectations and the largest increase in nearly 3 years.  Aug core CPI rose +2.4% y/y, weaker than expectations of +2.5% y/y.

The Eurozone July unemployment rate was unchanged at 6.4%, showing a slightly weaker labor market than expectations of 6.3%.

The Eurozone Aug S&P manufacturing PMI was revised downward by -0.1 to 52.7 from the previously reported 52.8.

German July retail sales unexpectedly fell by -3.4% m/m, weaker than expectations of +0.5% m/m and the biggest decline in 5 years.

ECB Governing Council member Martin Kocher said, "Upside risks to inflation have increased again recently.  If this picture is confirmed in the ECB's new forecast, I believe another interest rate hike will be necessary in the near future."

The UK Aug S&P manufacturing PMI was revised upward by +0.2 to 51.7 from the previously reported 51.5.

Markets are discounting a 99% chance of a +25 bp ECB rate hike at its next policy meeting on September 10.

US Stock Movers

Chipmakers and AI-infrastructure stocks retreated on Tuesday amid the surge in bond yields.  Lam Research (LRCX), Applied Materials (AMAT), KLA Corp (KLAC), ARM Holdings Plc (ARM), and Texas Instruments (TXN) closed down more than -3%.  Also, Advanced Micro Devices (AMD), Microchip Technology (MCHP), ASML Holding NV (ASML), Micron Technology (MU), Analog Devices (ADI), and Qualcomm (QCOM) closed down more than -2%. 

Cybersecurity stocks sold off on Tuesday, weighing on the broader market.  CrowdStrike Holdings (CRWD) closed down more than -7%, and Cloudflare (NET) and SentinelOne (S) closed down more than -6%.  Also, Palo Alto Networks (PANW), Fortinet (FTNT), and Zscaler (ZS) closed down more than -5%, and Okta (OKTA) closed down more than +4%. 

Cryptocurrency stocks moved lower on Tuesday after Bitcoin (^BTCUSD) fell more than -2%.  Circle Internet Group (CRCL), Strategy (MSTR), Riot Platforms (RIOT), and Coinbase Global (COIN) closed down more than -6%.  Also, MARA Holdings (MARA) and Galaxy Digital Holdings (GLXY) closed down more than -4%. 

Mining stocks fell on Tuesday as gold, silver, and copper prices slumped.  Freeport-McMoRan (FCX) closed down more than -4%, and Hecla Mining (HL), Anglogold Ashanti (AU), Barrick Mining (B), and Southern Copper (SCCO) closed down more than -3%.  Also, Coeur Mining (CDE) and Newmont Corp (NEM) closed down more than -2%.

Home builders and home supplies fell on Tuesday after the 10-year T-note yield rose to a 1.75-year high, raising mortgage rates and weighing on housing demand.  Builders Firstsource (BLDR) closed down more than -5%, and DR Horton (DHI), Pulte Group (PHM), KB Home (KBH), Toll Brothers (TOL), and Home Depot (HD) closed down more than -2%.  Also, Lennar (LEN) closed down more than -1%. 

Defensive health insurance stocks moved higher on Tuesday, with the slump in the broader market.  Humana (HUM) and CVS Health Corp (CVS) closed up more than +3%, and Elevance Health (ELV), Cardinal Health (CAH), the Cigna Group (CI), and Molina Healthcare (MOH) closed up more than +2%.  Also, UnitedHealth Group (UNH) and Centene (CNC) closed up more than +1%.

Fervo Energy (FRVO) closed up more than +28% on a Wall Street Journal report that said the company has signed a deal to sell power to Alphabet’s Google. 

Duolingo (DUOL) closed up more than +7% after Evercore ISI upgraded the stock to outperform from in line with a price target of $210.   

Howmet Aerospace (HWM) closed up more than +4% after Citigroup said Monday’s selloff in the stock was “overblown,” and maintains its buy rating on the stock.

Earnings Reports (9/2/2026)

Broadcom Inc (AVGO), Brown-Forman Corp (BF/B), Five Below Inc (FIVE), Hewlett Packard Enterprise Co (HPE), NetApp Inc (NTAP), Ollie's Bargain Outlet Holding (OLLI), PVH Corp (PVH), Snowflake Inc (SNOW).