The major averages pulled back on Wednesday, despite several strong earnings reports, as investors stayed cautious amid elevated government bond yields.
The Dow Jones Industrial Average fell about 170 points, dragged down by a 2.6% decline in Caterpillar‘s stock. The S&P 500 fell 0.4%. The technology-focused Nasdaq Composite dipped 0.3%.
Stocks fluctuated between losses and gains on Wednesday. At its session low, the Nasdaq was on track to close in correction territory, more than 10% off its record close in November.
Elevated bond yields are plaguing the market this year, as investors prepare for the possibility of more aggressive tightening by the Federal Reserve. The U.S. 10-year Treasury yield topped 1.9% earlier on Wednesday, its highest level since December 2019. The 10-year rate started the year around 1.5%.
“Investors worry that higher rates and tighter financial conditions will lead to valuation compression, in effect undoing much of the Fed’s decade-long largesse,” Jack Ablin, Cresset Capital founding partner and CIO, told clients.
Equities declined despite a slew of strong corporate earnings results. Bank of America beat Wall Street estimates as it released pandemic-related loan loss reserves. Shares rebounded 1%, a day after sliding 3.4%. Other bank stocks, however, were in the red.
Procter & Gamble shares popped 4.1% after the consumer giant reported fiscal second-quarter earnings and revenue that topped Wall Street’s expectations. The company raised its outlook for sales growth.
“Higher inflation has raised concerns about input costs for many companies. Since [Procter & Gamble’s] margins were fine, this has relieved some of those concerns,” said Matt Maley, chief market strategist at Miller Tabak + Co.
UnitedHealth also rose slightly after beating on the top and bottom lines of its quarterly results.
On the negative side, home builders also were broadly lower following after KeyBanc downgraded the group on concerns over looming interest rate hikes that will drive up borrowing costs. KB Home lost 3%, Lennar fell 2.9% and D.R. Horton fell 2.8%.
Shares of Sony tumbled 2.7% the day after Microsoft said it is buying video game publisher Activision Blizzard for nearly $69 billion. Sony’s PlayStation competes with Microsoft’s Xbox consoles. The drop in Sony’s stock comes after shares slid 7.2% on Tuesday.
Earnings season is picking up on Wall Street and so far the majority of companies have surpassed analyst expectations. Of the 44 S&P 500 companies that have reported quarterly results, nearly 73% have topped Wall Street’s expectations, according to FactSet.
Surging bond yields spurred the sell-off in stocks on Tuesday. The 2-year Treasury rate — which reflects short-term interest rate expectations — topped 1% for the first time in two years.
On Tuesday, the Dow Jones Industrial Average lost more than 540 points, dragged down by a 7% drop in Goldman Sachs. The Wall Street bank missed analysts’ expectations for earnings as operating expenses surged 23%.
The S&P 500 declined 1.8% on Tuesday. The Nasdaq Composite, full of interest rate sensitive technology stocks, was the relative underperformer, dipping 2.6%.