S&P 500 continues grind lower to 4670, as rising US real yields hurt tech stocks

• The S&P 500 is on course to fall again, weighed by underperformance in tech amid higher US bond yields.
• Markets expect a more hawkish Fed in 2022, which is pushing real yields higher.

US equity markets are trading heavily on Tuesday, as traders reassess equity valuations amid a continued sharp rise in US real yields that reflect the rebuilding of Fed policy tightening expectations for 2022. Three-month eurodollar futures for December 2022 (a proxy for where markets think the Fed funds rate is going to be at the end of next year) currently trade close to 98.95, down from above 99.05 at the end of last week. That implies that Jerome Powell’s renomination to the Fed chair position for a second term has spurred markets to price in an additional 10bps in rate hikes for 2022 (now more than 80bps, or over three 25bps rate hikes). The 10-year TIPS yield now trades at -0.95%, up from under to -1.10% at the end of last week, whilst the nominal 10-year yield up about 10bps on the week to close to 1.65%.

As a result, the S&P 500 continues to trade on the back foot and is down 0.3% and under 4670 in early US trade, following Monday’s 0.4% loss than masks a 1.3% pullback from earlier session highs in the 4740s. The tech-laden S&P 500 communications services and information technology indices are both lower by about 1.0% on Tuesday, while the big tech-dominated Nasdaq 100 index is also down about 1.0%, following on from Monday’s 1.2% drop. Tech stock valuations tend to rely more on expectations for future earnings growth than on current earnings, meaning that valuations are more vulnerable to rising yields, which increases the opportunity cost of relying on future rather than current earnings.

Unsurprisingly, bank stocks are benefitting from the rise in real and nominal bond yields, with the S&P 500 financials index up nearly 0.8% on Tuesday. The S&P 500 energy index, meanwhile, rallied 2.5% amid rising crude oil prices (WTI is up nearly 2.0% on the day to $78.00). Oil markets seemingly saw a “sell the rumour, buy the fact” reaction to announcements from the US and other major oil-consuming nations of reserve releases. In fairness, analysts only thought this would have a modest impact on oil prices as a release of reserves doesn’t solve the structural imbalance currently being seen between supply and demand that has supported prices. OPEC+ also maintains the option to reduce output hikes in the months ahead to compensate for the oil reserve releases.