Bond yields surge as Wall Street fears more potential Federal Reserve rate hikes

Wall Street experienced a decline on Wednesday, as driven by Alphabet and Amazon, amid rising Treasury yields and Iran's President Masoud Pezeshkian's assertion that Tehran would not yield to US pressure. Oil prices surged over 3%, and the S&P 500 energy sector index rose by 1% following the Iranian President's UN speech, which came a day after US President Donald Trump threatened to annihilate Iran.

A survey revealed that US business activity surged to a five-year high in September, contributing to higher government bond yields and raising the prospect of additional rate hikes by the Federal Reserve at its October meeting. Two-year Treasury yields reached their highest level since 2024, while 10-year Treasury yields climbed to their highest mark since 2007.

Market participants are seeking a resolution to the Middle East conflict, and without it, higher rates could persist, negatively impacting the equity market, according to Lauren Cassidy, chief investment officer at Founders 100 ETF. Meta Platforms experienced a 2.3% increase, marking a 13% gain for the week following a positive response to its Muse AI assistant, which analysts believe could benefit tech infrastructure stocks while posing challenges to banks, online shopping platforms, and other consumer businesses.

Meanwhile, Alphabet fell by 3.5%, and Amazon, which excluded Muse from its shopping platform, dropped 2.4%. The PHLX chip index decreased by 1.4%, with Nvidia down 1.6%. The Nasdaq recorded record-high closes in the prior two sessions, reflecting optimism about AI-related companies on Wall Street. The S&P 500 is slightly below 2% from its record high close on August 13.

US President Donald Trump hosted a three-day visit from Chinese President Xi Jinping, focusing on extending the trade truce, AI regulation, and US arms sales to Taiwan. The S&P 500 closed at 7,714.35 points, the Nasdaq declined by 1.07% to 26,953.87 points, and the Dow Jones Industrial Average fell by 0.54% to 51,583.98 points. Seven out of the 11 S&P 500 sector indexes experienced declines, led by financials down 1.68% and communication services by 0.8%.

The S&P 500 trades at a valuation of less than 19 times expected earnings, the lowest level since 2023, as per LSEG data. AI-related giants have contributed significantly to the recent rise in earnings expectations. Markets also analyzed remarks from Federal Reserve Governor Michael Barr, who suggested the central bank may need to implement more interest rate increases due to inflation staying above the Fed's 2% target.

Traders now estimate a 71% probability of a Fed rate hike during the upcoming meeting, according to the CME Group’s FedWatch Tool. Casual dining chain Cracker Barrel increased by 6.5% after surpassing fourth-quarter sales estimates, while Paychex fell 7.1% after reporting that its largest segment missed first-quarter revenue projections.

Within the S&P 500, declining stocks outnumbered rising ones by a ratio of 1.5-to-one. The S&P 500 recorded 14 new highs and 31 new lows, while the Nasdaq reported 36 new highs and 161 new lows.