Technology shares led the S&P 500 lower on Thursday as a spike in bond yields fueled fears of equity valuations and caused investors to sell growth-focused high flyers.
The tech-heavy Nasdaq Composite dropped 2.5% as Apple, Alphabet, Microsoft and Facebook all fell at least 2%. Tesla slipped more than 5%. The S&P 500 slid 1.1%, falling from a record closing high reached in the previous session. The Dow Jones Industrial Average last traded 70 points lower after hitting a new intraday record high earlier in the day amid a rally in bank stocks.
The 10-year Treasury yield jumped 11 basis points above 1.75% at its session high, reaching its highest level since January 2020. The 30-year rate also climbed 6 basis points at one point, breaching the 2.5% level for the first time since August 2019. The jump in bond yields came after the Federal Reserve expressed its willingness to allow an overshoot in inflation. Rising rates can have an outsized impact on growth stocks as they make their future returns less valuable today.
“Risk of rates rising too fast remains a key concern,” said Craig Johnson, technical market strategist at Piper Sandler. “Buying pressure has not been equal over the last several weeks as growth stocks lag behind due to headwinds from higher interest rates.”
Bank stocks outperformed as higher interest rates tend to improve their profit margins. Banks can earn more from the widening gap between the rate they borrow at in the short term and the rate they lend out at in the long term. JPMorgan jumped 2%, while Goldman Sachs gained 1.9%. Citizen Financial popped 4% and Zions Bancorp rallied 3.6%.
Investors also digested a mixed bag of economic data Thursday. Weekly initial jobless claims totaled 770,000 for the week ended March 13, worse than an estimate of 700,000, according to economist polled by Dow Jones.
Meanwhile, the Philadelphia Federal Reserve’s manufacturing index showed a reading of 51.8, well exceeding Dow Jones consensus of 22.0 and hitting the highest level for the gauge since 1973.
The energy sector was the biggest loser with a 2.9% decline Thursday amid a drop in oil prices. WTI crude futures slid more than 7% to $60 per barrel, falling for a fifth straight day and suffering its worst day since September.
The blue-chip Dow closed above 33,000 for the first time on Wednesday after the Fed said it does not expect to hike interest rates through 2023.
Fed Chair Jerome Powell reiterated that the central bank wants to see inflation consistently above its 2% target and material improvement in the U.S. labor market before considering changes to rates or its monthly bond purchases.
“By saying that they’re willing to let inflation run hot at a time inflation concerns are rising is another way for the Fed to say that they are willing to let long-term interest rates rise further,” said Matt Maley, chief market strategist at Miller Tabak.
The Fed upgraded its economic outlook, expecting to see gross domestic product grow 6.5% in 2021 and inflation rise 2.2% this year as measured by personal consumption expenditures. The central bank’s stated goal is to keep inflation at 2% over the long run.