The S&P 500 and the Dow Jones ended at just below the flat line on Tuesday as investors struggled to digest concerns over interest rates remaining higher for longer and also assessed latest earnings reports.
The S&P 500 fell for the second day in a row for the first time since September 3-6, which was a four-day losing streak. The Dow Jones was little changed, while the Nasdaq Composite outperformed with gains of 0.2%.
Exposure to the S&P 500 has reached levels that were followed by a 10% slump in the past, according to Citigroup Inc. strategists led by Chris Montagu. Long positions on futures linked to the benchmark are looking “particularly extended,” they said.
“We’re not suggesting investors should start to reduce exposure, but the positioning risks do rise when markets get extended like this,” they said.
Treasury 10-year yields hovered near 4.20%. The euro hit the lowest since early August amid bets the European Central Bank will keep lowering rates. Oil advanced as traders tracked tensions between Israel and Iran. Gold climbed to a fresh record.
Wall Street is paring back bets on aggressive policy easing as the US economy remains robust while Fed officials sound a cautious tone over the pace of future rate decreases. The CME FedWatch Tool is now predicting a 91% probability of the Fed cutting by 25 basis points in November.
Rising oil prices and the prospect of bigger fiscal deficits after the upcoming presidential election are only compounding the market’s concerns. Since the end of last week, traders have trimmed the extent of expected Fed cuts through September 2025 by more than 10 basis points.
“Of course, higher yields do not have to be negative for stocks. Let’s face it, the stock market has been advancing as these bond yields have been rising for a full month now,” said Matt Maley at Miller Tabak + Co. “However, given how expensive the market is today, these higher yields could cause some problems for the equity market before too long.”
Meantime, the International Monetary Fund said the US election is creating “high uncertainty” for markets and policymakers, given the sharply divergent trade priorities of the candidates. That gap creates the risk of another potential round of volatility on global markets similar to the rattling August selloff.
“Presidents don’t control markets,” said Callie Cox at Ritholtz Wealth Management. “Over time, the stock market’s common thread has been the economy and earnings, not who’s in the Oval Office. Be prepared for mood swings in markets as we get closer to Election Day. But remember that election-fueled storms often dissipate quickly.”
In specific stocks, Starbucks Corp. pulled guidance for 2025 after sales plunged for a third consecutive quarter. McDonald’s Corp. plunged as its Quarter Pounders were linked to an E. coli outbreak in the US. Both shares fell afterhours.
Traders are also eyeing a fresh slate of earnings reports that are set to come out this week, including Tesla and Coca-Cola on Wednesday and Honeywell on Thursday.
(With Inputs From Agencies.)
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