The Bond Market Strikes Again. Stocks ended lower on Tuesday despite a intraday uptick as bond market weakness continued to take its toll on equities.
The Dow Jones Industrial Average fell 0.3%, or 131 points. The S&P 500 dropped 0.2% and the tech-heavy Nasdaq Composite lost 0.1%.
All three indexes experienced more significant declines earlier in the day, but somewhat recovered when New York Federal Reserve President John Williams made public remarks that many investors interpreted as dovish. The Fed official's comments, along with the cooler-than-expected jobs data released Tuesday, lowered the odds of a rate hike at the Fed's October meeting to roughly 52%, compared to 71% the day prior. Yields for the 2-year bond, a gauge of where investors expect the Fed fund rates to go, also fell.
The oil market also did its part to boost stocks today. Brent futures sat near $96 per barrel while West Texas intermediate futures dropped below $90 a barrel.
But the prospected of a more optimistic Fed and declining oil futures weren't enough to offset the drag the bond market had on stocks. The 30-year Treasury yield ticked up to 5.623%, its highest intraday level since 2002, according to Dow Jones Market Data. The 10-year note yielded nearly 5.3%.
Luke Lango, a tech analyst at Innovation Investor, described Treasury yield levels as "a genuinely worrisome amount of financial tightening that in most markets would likely trigger a crash or even a recession."
The stock market is still in a relative lull in between earning seasons. And the modest but erratic midday stock moves today underline just how eager investors are for news of any kind.
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The Hot Stock: Carnival Corp. +13% The Biggest Loser: Fair Isaac Corp. -27%
Best Sector: Utilities +1.1% Worst Sector: Energy -0.9%
The AI of It All
AI stocks have been the primary driver of the bull market, but what if that success story were to take a turn?
Equities have been remarkably resilient amid a swell of macro uncertainties. The S&P 500 is trading roughly 0.4% away from its all-time peak despiteTreasury yields sitting at multi-year highs, and elevated oil prices as the war in Iran drags on.
After months of handwringing about those factors, though, some stock watchers believe the greatest risk to the current market is the AI trade itself.
"Macro risks are struggling to compete for attention as AI FOMO dominates and drives aggressive dip-buying (the AI-put)," writes Bank of America's Equity Derivatives Team. "While a meaningful further rise in rates stress could create near-term downside risks for tech (as in 2022), the bigger risk in our view is a hiccup in the AI narrative dampening hope that the productivity growth it promises is the hedge against fiscal unsustainability."
Investors are all too familiar with the finicky nature of AI sentiment. Remember the 2024 DeepSeek moment? The release of a Chinese open source AI model sparked a widespread panic on Wall Street, and Nvidia lost 17% in a single day.
There's no question that AI stocks have been doing the heavy lifting in today's market, and obscuring what can otherwise be a bleak picture. The median stock in the S&P 500 was 16.7% off from its 52-week closing high, according to Dow Jones Market Data.
If AI stocks are propping up indexes while the rest of the market struggles, what happens if investor appetite for the AI trade dampens? "Without the AI-put, all other risks could become materially amplified," writes Bank of America.
It's tough to imagine the carnage that would be left if the AI trade were to stop pulling its weight. Here's to hoping that risk won't become a reality for investors.
The Calendar
Cal-Maine Foods, ConagraBrands, FactSet Research Systems, and Micron release earnings tomorrow.
The Bureau of Economic Analysis releases the personal consumption expenditures price index for August. Economists forecast a 3.7% year-over-year increase, the same as the July figure. The core PCE price index, which excludes volatile food and energy prices, is expected to rise 3.3%, also matching the July data. Federal Reserve Chairman Kevin Warsh recently reiterated his commitment to bringing inflation down to 2%, as measured by the core PCE. The index was last at or below that level in February 2021.
The BEA releases its third and final estimate of second-quarter gross-domestic-product growth. Expectations are for real GDP to have grown at 1.5% seasonally adjusted annual rate, unchanged from the BEA's second estimate, released in late August.
- Dan Lam
What We're Reading Today
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