Here's what happens to the economy when Treasury yields soar like they are now

US stocks slipped on Wednesday, driven down by Alphabet and Amazon, amid rising Treasury yields and Iran's president asserting that Iran would not yield to US pressure. Oil prices jumped nearly 4% after Iranian President Masoud Pezeshkian's speech at the UN, following US President Donald Trump's warning of potential military action against Iran.

A survey reported that US business activity in September surged to a five-year high, prompting government bond yields to increase and expectations of the Federal Reserve raising interest rates at its October meeting. Two-year Treasury yields hit their highest since 2024, while 10-year yields reached their peak since 2007.

The market craved a resolution to the Middle East conflict, with Lauren Cassidy, chief investment officer at Founders 100 ETF, stating that a lack of progress would keep interest rates elevated and harm the equity market. Meta Platforms experienced significant gains this week following the favorable reception of its Muse AI assistant, which could positively impact tech infrastructure stocks while posing challenges to banks, online shopping platforms, and other consumer businesses. Meanwhile, Alphabet and Amazon declined, with Nvidia losing ground.

The Nasdaq recorded record-high closes in the two prior sessions, reflecting Wall Street's optimism about AI-related companies. The S&P 500 was less than 2% below its record high close on August 13. US President Donald Trump met with Chinese President Xi Jinping in Washington for a three-day visit, discussing topics such as extending the trade truce, AI regulation, and US arms sales to Taiwan.

According to preliminary data, the S&P 500 closed 57.74 points (0.74%) lower at 7,706.39 points, while the Nasdaq Composite dropped 308.24 points (1.10%) to 26,943.61. The Dow Jones Industrial Average fell 340.39 points (0.66%) to 51,523.30. The S&P 500 trades at approximately 19 times expected earnings, its lowest valuation since 2023, as reported by LSEG data. AI-related heavyweights have contributed significantly to the recent rise in earnings expectations.

Interest rate hikes are now priced in, with a 71% chance of the Fed raising rates at its upcoming policy meeting, based on the CME Group's FedWatch Tool. Casual dining chain Cracker Barrel reported beating fourth-quarter sales estimates, while Paychex, an HR and payroll services provider, missed first-quarter revenue estimates.