U.S. stocks fall as Treasury yields continue to surge

What’s driving markets

The yield on the 10-year Treasury
BX:TMUBMUSD10Y
rose to the highest level since 2019, topping 2.75% as a selloff extended to a seventh straight session. Yields move in the opposite direction to prices.

Rising bond yields can be a headwind for stocks, particularly tech and other growth stocks whose valuations are based on expected profit and cash flow far into the future. Higher yields on risk-free Treasurys mean those future flows are less valuable in present terms.

Ahead of bank earnings and inflation data later in the week, traders were left focusing on the health of the market.

Read: U.S. banks are facing body blows from Ukraine war and a slump in investment banking activity

Michael Darda, chief economist and market strategist at MKM Partners, said the S&P 500 is overvalued even with the recent pullback. He said that for the equity risk premium — the earnings yield minus the bond yield — to move back to its five-year average, one of four things would have to happen: bond yields to fall by around 100 basis points, earnings to rise about 20%, the stock market to fall about 17% or some combination of the three.

“Our valuation work shows that financials remain the most attractive cyclical sector while healthcare is the most attractive defensive sector. High valuation tech across the capitalization structure remains an ‘avoid’ or a short, in our view,” said Darda.

Need to Know: It’s still not time to invest in China, argues Bank of America. Here’s why.

Stocks to watch

• Elon Musk remained in the headlines after Twitter Inc.
  TWTR
  Chief Executive Parag Agrawal said Tesla Inc.
  TSLA
  chief “has decided not to join our board.” Twitter had announced last week that Musk would join the board after regulatory filings revealed that had become the social-media platform’s top shareholder. Twitter shares fell 1.8%.

• The impact of China’s lockdowns were on display as electric-vehicle maker Nio Inc.
  NIO
  said it would have to suspend production due to disruptions to its supply chain. Nio’s American depositary shares were down 9.6%.

• Shares of Shopify Inc.
  SHOP
  fell 0.4% after the Canada-based e-commerce software company said it was planning for a 10-for-1 split of its common stock, in an effort to make its shares “more accessible to all investors.”

• Sailpoint Technologies Inc. shares
  SAIL
  surged nearly 30% after the cybersecurity company confirmed an agreement to be acquired by private equity firm Thoma Bravo in a deal valued at $6.9 billion.

• Veru Inc. shares
  VERU
  rose nearly 34% after the biopharmaceutical company announced positive results from a Phase 3 trial of its oral COVID-19 treatment.

How other assets are trading

• The ICE U.S. Dollar Index
  DXY,
  a measure of the currency against a basket of six major rivals, was up 0.1%.

• Oil futures retreated, with the U.S. benchmark
  CL
  down 4% to trade near $94.50 a barrel. Gold futures
  GC00
  rose 1% to around $1,965 an ounce.

• Bitcoin
  BTCUSD
  slumped 3% to trade near $41,000.

• The Stoxx Europe 600
  XX:SXXP
  and London’s FTSE 100
  UK:UKX
  were both down 0.5%.

• Stocks slumped in Asia, with the Shanghai Composite
  CN:SHCOMP
  ending 2.6% lower, while the Hang Seng Index
  HK:HSI
  fell 3% in Hong Kong, and Japan’s Nikkei 225
  JP:NIK
  shed 0.6%.