Stocks slipped at midday on Tuesday as two worries hit at once: government bond yields pushed toward 5% and oil kept climbing, all with the Federal Reserve due to announce its interest-rate decision tomorrow.
The Dow was down about 412 points (0.8%), the S&P 500 off roughly 0.5%, and the Nasdaq lower by 0.7%.
Bonds and oil are running the show
The 10-year Treasury yield, the benchmark that helps set borrowing costs across the whole economy, jumped to 5.041%, its highest since 2007, before easing back toward 5.00%.
US 10Y Treasury Yield
Source: TradingView
Here is the simple version: when bond prices fall, their yields rise, and a near-5% “risk-free” yield gives investors a real reason to hold bonds instead of shares.
Oil piled on. Brent crude rose about 3% above $109 a barrel and U.S. WTI gained roughly 5% past $106, after Saudi Arabia shut a key pipeline that moves oil around the Strait of Hormuz.
Higher oil pushes up inflation and inflation is exactly what is making bond investors demand higher yields in the first place.
Wells Fargo Strategist Ohsung Kwon Downgrades S&P Target
Wells Fargo doubts the stock market will rise much further from where it sits today.
Strategist Ohsung Kwon lowered his end-of-year target for the S&P 500 from 7,950 down to 7,700, which leaves just a 1% gain from Monday's closing price of 7,619.98.
Kwon believes the economic growth phase is nearing its end, which will likely reduce stock valuations. Before the S&P 500 hits his target, he warns the market could fall 5% to 10% first, potentially dropping to 7,239, a level not seen since June.
Bank of America Drop Is an Overreaction, Says Morgan Stanley
Morgan Stanley believes investors overreacted when Bank of America’s stock dropped more than 5% on Monday after the bank warned of a weak third quarter.
Analyst Manan Gosalia pointed out that the steep drop was excessive, especially since he only trimmed his earnings forecast by 1.5%. While lower investment banking fees and higher expenses are weighing down third-quarter results, Morgan Stanley expects business to bounce back in the fourth quarter.
As a result, the firm kept its positive "Overweight" rating on Bank of America with a $67 price target, implying a potential 12.7% gain from Monday’s closing price.
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