S&P 500 faces yield test as 10-year Treasury tops 4.63%

Rising bond yields are testing the stock market's resilience as the 10-year Treasury climbs to its highest level in two months.

The S&P 500 slipped 0.2% to 7,443.28 on Monday as the 10-year Treasury yield climbed to 4.64%, its highest since May 20, reigniting concerns about equity valuations in a higher-rate environment. The Dow Jones Industrial Average fell 307 points, or 0.6%, to 51,839.26, while the Nasdaq Composite edged down less than 0.1% to 25,508.07.

"The market is grappling with the reality that rates may stay higher for longer, and that's a direct challenge to the valuation expansion we've seen," said Peter Boockvar, chief investment officer at OnePoint BFG Wealth Partners. Mike Dickson, head of research at Horizon Investments, said the key question is whether earnings growth can keep pace with the rising discount rate that higher yields impose on future cash flows.

The yield on the benchmark 10-year note rose 3.4 basis points to 4.632%, reaching 4.640% intraday. The move higher in yields pressured growth-sensitive sectors, with the Health Care Select Sector SPDR falling 1.2%, the Materials Select Sector SPDR dropping 0.9%, and the Industrials Select Sector SPDR declining 0.8%. The Communication Services Select Sector SPDR was the only S&P 500 sector to gain ground, rising 0.7%. The CBOE Volatility Index edged down 0.6% to 18.65, suggesting the selloff was orderly rather than panic-driven. Trading volume totaled 15.5 billion shares, below the 20-session average of 19.9 billion.

The rise in yields comes as traders increase bets that the Federal Reserve will raise interest rates this year, with swaps markets pricing in 42 basis points of hikes and a full quarter-point increase fully priced in for September. The Fed held rates steady at its June meeting but signaled it expects to raise borrowing costs later this year as inflation remains above the central bank's 2% target. For equity investors, the question is whether corporate earnings can grow fast enough to offset the drag from higher discount rates — a dynamic that will be tested this week as results from Intel, Alphabet and others are due.

Cross-asset pressure builds

The dollar strengthened as yields rose, with the DXY index gaining 0.17% to 101.16, extending its longest winning streak since mid-May. The Japanese yen weakened 0.41% to 163.14 per dollar, breaching the 163 mark for the first time since December 1986, keeping traders on alert for possible intervention from Tokyo. Oil prices added to the macro uncertainty, with Brent crude rising 2% to $91.01 a barrel and West Texas Intermediate gaining 2% to $84.91, both closing at five-week highs as Middle East tensions escalated.

The simultaneous rise in yields, a stronger dollar and higher oil prices creates a challenging backdrop for equities, particularly for sectors with elevated valuations that are most sensitive to changes in the discount rate. The Nasdaq Composite remains more than 20% below its late-June record closing high, while the semiconductor index bounced 5.2% on Friday after falling into correction territory.

"Investors are looking at earnings to see if they justify the move up we had in the second quarter," said Adam Sarhan, chief executive of 50 Park Investments in New York. With the 10-year yield now above 4.6% and the Fed signaling no near-term relief, the burden of proof falls on corporate profits to support current stock prices.

This article is for informational purposes only and does not constitute investment advice.