Stocks give back some ground as bond yields ease

Stocks on Wall Street closed broadly lower Tuesday, giving back some of their big gains from the day before.

The Standard & Poor’s 500 index fell 0.8% after earlier flipping between small gains and losses. The prior day, the benchmark index leaped 2.4%, its best performance since June. Technology and internet stocks accounted for much of Tuesday’s selling, a reversal from a day earlier.

For weeks, investors have been focused on the bond market, where a swift recent rise in interest rates is threatening one of the main reasons for the stock market’s pandemic-era run to record highs. Bond yields eased across the board Tuesday, but expectations for stronger economic growth in coming months continue to fuel worries that interest rates will head higher.

Higher interest rates cause investors to rethink how much they’re willing to pay for stocks, making each dollar of profit that companies earn a little less valuable. That’s making Wall Street reconsider the value of technology stocks, in large part because those stocks’ recent dominance left them looking even pricier than the rest of the market.

“Valuations have just become problematic across certain pockets of the U.S. [stock] market, and investors are starting to realize that,” said Megan Horneman, director of portfolio strategy at Verdence Capital Advisors.

The S&P 500 fell 31.53 points to 3,870.29. The Dow Jones industrial average fell 143.99 points, or 0.5%, to 31,391.52. The tech-heavy Nasdaq composite dropped 230.04 points, or 1.7%, to 13,358.79.

Smaller companies fared worse than the rest of the market. The Russell 2000 index of smaller-company stocks slid 43.81 points, or 1.9%, to 2,231.51.

Treasury yields have been climbing with expectations for economic growth and inf lation, and such a rise makes borrowing more expensive for home buyers, companies taking out loans and virtually everyone else. That can slow economic growth.

The yield on the 10-year Treasury eased a bit Tuesday, falling to 1.41% from 1.44% late Monday. That reprieve followed weeks of relentless rising. The 10-year yield surpassed 1.50% last week, up from roughly 0.90% at the start of the year, and the zoom higher raised worries that more increases would destabilize the market.

Investors should be prepared for more risks in sectors that have driven the market’s growth through the pandemic because of more inflation, said Cliff Hodge, chief investment officer of Cornerstone Wealth.

Tech stocks were weak again Tuesday, with those in the S&P 500 falling 1.6%. But Wall Street strategists remain fairly optimistic, saying stocks in other areas of the market are likely to rise with expectations for the economy’s improvement this year. Gains for banks, energy producers and other companies whose profits are closely tied to the economy’s strength can help offset a pullback for tech stocks, which had been driving the market for years, the thinking goes.

Shares of Zoom Video Communications, whose software helps students and workers around the world talk with one another from a distance, fell 9% as concerns over slower subscriber growth offset its otherwise solid quarterly financial report and forecast.

Rocket Cos. soared 71.2%, the latest stock to be hyped in the online forum that fueled the sharp rise in GameStop and other stocks in January. Rocket shares were among the most shorted by hedge funds, according to FactSet.

Rocket, which operates Rocket Mortgage and other personal finance brands, said last week that its revenue more than doubled in the fourth quarter, reflecting strong growth across all its businesses.

On Tuesday, Federal Reserve Gov. Lael Brainard sought to calm financial markets by emphasizing that the Fed, although generally optimistic about the economy, is still far from raising interest rates or reducing its $120 billion a month in asset purchases.

She also said the Fed is closely monitoring the recent rise in the 10-year Treasury yield and an increase in investors’ inflation expectations. But she repeatedly said that the U.S. economy is 10 million jobs short of its pre-pandemic level and that the Fed would keep interest rates near zero until the job market has fully recovered.