Stocks sink, Treasury yields jump as investors face hawkish Fed

U.S. stocks sank lower to start the week, extending a sell-off that began Friday after hawkish remarks by Fed Chair Jerome Powell at the central bank’s gathering in Jackson Hole.

The S&P 500 tumbled 0.8%, while the Dow Jones Industrial Average shed 220 points, or 0.7%. The tech-heavy Nasdaq Composite was off by 1.2%.

Meanwhile in the bond market, the benchmark 10-year Treasury note surged above 3.1%, and the 2-year Treasury yield spiked to top 3.4%, hitting its highest level since 2007 early Monday.

The moves come after the Nasdaq plunged 3.9% on Friday and the S&P 500 tanked 3.3%, with both indexes logging their biggest one-day drops since June 13. The Dow erased 1,000 points during the session, or roughly 3%.

“Chair Powell’s speech was a good reminder that 2-year Treasury yields are more important to equity markets than whether the FOMC moves by 50 or 75 basis points at upcoming meetings,” DataTrek’s Nicholas Colas said in a Monday note, pointing out that U.S. large-cap stocks have been sensitive to the 2-year benchmark.

The jump in 2-year yields from 2.28% to 3.45% in mid-June was what cracked equity valuations, with the S&P hitting its June 16th low after yields peaked on June 14th at 3.45%, Colas said. And once 2-year yields leveled out near3%, the S&P 500 rallied 17% through August 16th.

The most significant risk to stocks is weakness in earnings, according to Morgan Stanley’s Mike Wilson, who indicated that while the first half of the year was dictated by Federal Reserve policy and tighter financial conditions, the second half will be determined by earnings expectations for next year.

“As a result, equity investors should be laser focused on this risk, not the Fed, particularly as we enter the seasonally weakest time of the year for earnings revisions, and inflation further eats into margins and demand,” Wilson said.

Wells Fargo Head of Global Asset Allocation Strategy Tracie McMillion asserted a similar view in an interview with Yahoo Finance Live on Friday.

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“What we heard today was that growth is too strong,” McMillion said. “What that means for earnings is that we’re likely going to have to see some cuts to Q3 and Q4 earnings expectations.”

The earnings season is nearing an end, but results from several headliners remain on tap for investors this week, including Best Buy (BBY), HP (HPQ), Big Lots (BIG), Chewy (CHWY), Lululemon Athletica (LULU), and Broadcom (AVGO).

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Alexandra Semenova is a reporter for Yahoo Finance. Follow her on Twitter @alexandraandnyc

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