S&P 500, Nasdaq Retreat from Records as Oil, Yields Rebound

The S&P 500 and the Nasdaq Composite pulled back from record closing highs on Wednesday, as rising oil prices and a renewed surge in long-term Treasury yields dampened risk appetite and revived inflation concerns.

All three major U.S. stock indexes ended modestly lower. The S&P 500 fell 17.18 points, or 0.22%, to 7,801.75, snapping a four-day winning streak. The Dow Jones Industrial Average dropped 341.11 points, or 0.66%, to 51,180.17, also ending a four-day run of gains. The Nasdaq Composite lost 61.19 points, or 0.22%, to 27,538.69, its first decline in six sessions.

The small-cap Russell 2000 underperformed, falling 1.3%.

The retreat followed Tuesday’s rally that had pushed both the S&P 500 and the Nasdaq to record closing highs. That move was undone by a jump in benchmark 10-year and 30-year Treasury yields, with the 30-year yield touching its highest level since 2002 at 5.72%, according to the Economic Times. Brent crude settled above $100 a barrel, driven by ongoing supply concerns linked to the Iran conflict.

“We’re seeing a little bit of profit-taking today. The market is very focused on the Fed minutes, but ultimately it’s where oil prices and yields move that will determine the market’s direction today,” Peter Cardillo, chief market economist at Spartan Capital Securities, told the Economic Times.

Higher energy costs have revived fears that inflation will remain stubborn, prolonging the Federal Reserve’s rate-hiking cycle. Those concerns, combined with elevated corporate and sovereign debt levels, have triggered a global bond selloff in recent weeks.

Minutes from the Fed’s September meeting, at which policymakers unanimously approved the first rate hike since July 2023, revealed internal divisions over the rationale. According to the minutes, some participants saw the rate increase as necessary to contain the impact of energy price shocks, while others viewed it as essential to curb demand-driven inflation.

Markets are now pricing in a 17.2% likelihood of a second consecutive rate hike at the conclusion of the October meeting, down sharply from 37.6% a week ago, per CME’s FedWatch tool.

“The market’s Fed expectations are going to seesaw as it gets new bits of data,” said Thomas Martin, senior portfolio manager at GLOBALT in Atlanta. “There’s still an expectation for more rate hikes, but it isn’t necessarily going to be a hike every meeting and that’s what the market is telling you; October will be a pause.”

Stocks pared some losses after crude prices turned lower following the International Energy Agency’s agreement to accelerate the release of oil stocks, prioritizing diesel.

Sector performance was mixed. Among the S&P 500’s 11 sectors, industrials suffered the steepest percentage drop, while healthcare led the gainers. Energy stocks also rose, gaining 0.6%, as higher crude prices boosted the sector.

The 30-year fixed mortgage rate surged last week to a near three-year high, according to the Mortgage Bankers Association, weighing on housing and homebuilding stocks, which fell 2.3% and 2.9%, respectively.

Chip stocks, which have surged more than 80% year-to-date, dropped 1.2%. SpaceX lost 2.5% following media reports that the aerospace firm was seeking $40 billion in financing to fund purchases of Nvidia chips, according to Reuters.

The broader market has lagged the headline indexes. The equal-weighted S&P 500 remains more than 5% below its record high, while the interest-rate-sensitive Russell 2000 is more than 8% below its all-time peak.

Earnings season is expected to begin in earnest next week, with several major financial firms reporting. Analysts expect aggregate S&P 500 earnings to grow 30.6% year-on-year for the third quarter, according to LSEG. Energy sector earnings are forecast to surge 114.7%, while technology profits are projected to jump 66.5%. Investors are likely to scrutinize the extent to which massive spending on artificial intelligence is translating into results, as well as the health of the U.S. consumer amid rising inflation.

Breadth was negative. Declining issues outnumbered advancers by a 3.34-to-1 ratio on the New York Stock Exchange and by a 2.37-to-1 ratio on the Nasdaq. The NYSE recorded 115 new 52-week highs and 497 new lows, while the Nasdaq posted 32 new highs and 250 new lows.

Volume on U.S. exchanges totaled 16.21 billion shares, compared with the 17.57 billion average over the last 20 trading days.