Tech stocks lead indexes lower as yields rise

Stocks closed lower Wednesday as another rise in bond yields fueled concerns on Wall Street that higher inflation is on the way as the economy picks up.

The S&P 500 dropped 1.3%, shedding an early gain. The pullback is the benchmark index’s second straight loss after clocking its best day in nine months on Monday. Technology companies bore the brunt of the selling, pulling the S&P 500’s tech sector down 2.5%. Microsoft and Apple fell more than 2%.

U.S. government bond yields rose after easing a day earlier. The yield on the benchmark 10-year Treasury note climbed to 1.47% from 1.41%. When bond yields rise quickly, as they have in recent weeks, it forces Wall Street to rethink the value of stocks, making each $1 of profit that companies earn a little less valuable. Technology stocks are most vulnerable to this reassessment, in large part because their recent dominance left them looking even pricier than the rest of the market.

On the flip side, banks benefit when bond yields rise, because it allows them to charge higher rates on mortgages and many other kinds of loans. Financial sector stocks were among the biggest gainers Wednesday. Bank of America and Citigroup added more than 2%.

“The good news to remember is there are other groups taking the baton,” said Ryan Detrick, chief investment strategist for LPL Financial, referring to banks and energy companies benefiting from higher rates, even as tech stocks take a hit.

The S&P 500 dropped 50.57 points to 3,819.72. The Dow Jones Industrial Average slipped 121.43 points, or 0.4%, to 31,270.09. The technologyheavy Nasdaq composite lost 361.04 points, or 2.7%, to 12,997.75.

Traders also sold off smaller company stocks, dragging down the Russell 2000 index 23.72 points, or 1.1%, to 2,207.79.

Wall Street continues to look to Washington, where economic data, comments out of the Federal Reserve and President Joe Biden’s stimulus package remain front and center. Treasury yields hit the psychologically important 1.50% mark last week as investors braced for stronger economic growth but also a possible increase in inflation.

“Some higher inflation at the beginning of a new economic expansion is perfectly normal,” Mr. Detrick said.

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

Federal Reserve Chair Jay Powell will speak Thursday on monetary policy. Last week he testified before Congress, but the format — a question-and-answer session with The Wall Street Journal — is likely to be more illuminating than Mr. Powell’s calculated answers to politicians.