U.S. stocks fell for a second straight session Tuesday as crude oil surged, the benchmark Treasury yield crossed 5% and investors sharply increased bets that the Federal Reserve will raise interest rates Wednesday.
By yourNEWS Media Newsroom.
Wall Street extended its retreat Tuesday as investors confronted a combination markets have not faced in years: oil above $100 a barrel, a benchmark U.S. Treasury yield above 5% and expectations that the Federal Reserve is about to begin raising interest rates again.
The Dow Jones Industrial Average fell 328.09 points, or 0.63%, to close at 52,093.11. The S&P 500 declined 34.25 points, or 0.45%, to 7,585.73, while the Nasdaq Composite dropped 204.84 points, or 0.78%, to 25,981.57. All three indexes extended Monday’s losses.
Selling spread broadly across the market, with energy providing the primary exception as escalating Middle East disruptions pushed crude prices sharply higher.
West Texas Intermediate crude jumped $4.44, or 4.38%, to settle at $105.83 a barrel, while Brent rose $3.07, or 2.9%, to $108.75. Both finished at their highest levels since May 19. U.S. diesel futures also closed at a record high.
Energy shares climbed 2.3%, making the sector the strongest performer in the S&P 500, while consumer discretionary stocks suffered the largest percentage decline.
The renewed energy shock is increasingly feeding into investors’ expectations for inflation, interest rates and economic growth.
“Given rising prices for fuel, especially diesel, given the near-certain outlook for rising rates beginning tomorrow, and given the concerns over the potential slowdown in the AI ecosphere, why step into the market aggressively until some of this clears up?” said Peter Tuz, president of Chase Investment Counsel in Charlottesville, Virginia.
The Federal Reserve began its two-day monetary policy meeting Tuesday and will announce its interest-rate decision Wednesday.
Markets overwhelmingly expect policymakers to raise the federal funds target range by a quarter percentage point, which would mark the central bank’s first rate increase in more than three years.
CME FedWatch pricing showed traders assigning a 94.5% probability to a 25-basis-point increase, up dramatically from 33.1% one month earlier.
The rapid repricing followed hotter inflation readings and a roughly 25% increase in U.S. crude prices over the previous two weeks.
Recent labor-market data have also continued to show economic resilience, reducing pressure on the Fed to prioritize weaker employment over inflation.
That leaves policymakers facing increasingly broad price pressures originating partly from the war and disruptions to global energy supplies.
“This will probably be not a one-and-done, but a series of rate increases,” said Paul Nolte, senior wealth adviser and market strategist at Murphy & Sylvest in Elmhurst, Illinois. “It will be dependent on oil; that is really the source of inflation and it’s starting to seep into other parts of the market.”
Oil’s latest move followed another deterioration in Middle East supply conditions.
Saudi crude loadings at the Red Sea port of Yanbu were suspended after attacks on the kingdom’s East-West Pipeline, while Riyadh canceled some late-September shipments to European customers.
The pipeline has become particularly important because it allows Saudi oil to move from the kingdom’s eastern producing region to the Red Sea without traveling through the Strait of Hormuz, where shipping has fallen dramatically during the U.S.-Israeli war with Iran.
The Iran-aligned Houthis attacked the East-West Pipeline on Friday, forcing Saudi Arabia to shut the key route. Fresh attacks Monday added to concerns over how quickly exports could return to normal.
Industry estimates for repairs have varied widely, from a possible restart within days to as long as eight weeks. The disruption potentially threatens a route carrying an amount equal to roughly 4% of global oil supply.
“The Middle East conflict is a wild card as to how long it might last,” Tuz said.
Investors were dealing simultaneously with another increasingly important problem: rapidly rising borrowing costs.
The benchmark 10-year Treasury yield climbed as high as 5.041% Tuesday, its highest level since 2007, before pulling back toward 5%.
The move matters well beyond the Treasury market.
The 10-year yield serves as a reference point for borrowing throughout the economy, influencing mortgage rates, corporate financing costs and the valuation investors place on stocks.
When relatively low-risk Treasury securities offer yields around 5%, investors also have less incentive to pay extremely high valuations for stocks whose expected profits may be years in the future.
That dynamic is particularly relevant to technology and artificial intelligence companies.
The AI boom has driven enormous spending on chips, data centers, electricity infrastructure and computing equipment, with some companies relying heavily on debt to finance those investments.
Higher bond yields increase financing costs at the same time that investors are scrutinizing whether the extraordinary levels of AI capital spending can generate sufficient returns.
The bond selloff is not limited to the United States. Average 10-year borrowing costs among the Group of Seven economies reached 4.285%, their highest level since mid-2008. German, British, French and Japanese sovereign yields have also climbed sharply.
Rising government debt has added another layer of pressure.
Investors have become increasingly concerned about the cost of servicing large sovereign debt loads at higher interest rates, particularly as governments issue more bonds to finance deficits.
U.S. federal debt has surpassed $40 trillion, while rising yields mean newly issued debt must increasingly be financed at substantially higher rates than during the low-interest-rate era.
Technology stocks entered Tuesday already weakened by another source of uncertainty.
Semiconductor companies were hit hard Monday amid escalating warnings from prominent AI executives and researchers about the potential risks of increasingly advanced systems, along with opposition to rapid data-center construction.
The Philadelphia Semiconductor Index managed only a 0.4% recovery Tuesday following Monday’s steep decline.
The combination of elevated valuations, expensive financing and uncertainty over whether AI development could face new voluntary or government restrictions has placed additional pressure on one of the market’s most important growth engines.
Tuesday’s market weakness was also broad beneath the major indexes.
Declining stocks outnumbered advancing shares by 2.56-to-1 on the New York Stock Exchange and 2.33-to-1 on the Nasdaq.
The NYSE recorded 673 new lows compared with 113 new highs, while the Nasdaq registered 264 new lows and 52 new highs.
Individual companies also produced large moves.
Dave & Buster’s plunged 19% after the restaurant and entertainment company missed Wall Street expectations for second-quarter revenue.
Healthcare technology company Waystar moved in the opposite direction, gaining 7.1% after reports that it is exploring strategic options, including a possible sale.
Cryptocurrency-related shares suffered another sharp decline.
Bitcoin weakness was compounded when the U.S. Senate failed to advance comprehensive digital-asset legislation. Coinbase fell 10.1%, while Strategy, the company formerly known as MicroStrategy and one of the largest corporate holders of bitcoin, dropped 5.4%.
Trading volume was also elevated, with approximately 15.85 billion shares changing hands on U.S. exchanges, above the 20-session average of 15.14 billion.
Investors now turn to Wednesday’s Federal Reserve decision for the next major signal.
A quarter-point increase is largely reflected in market prices, making the central bank’s accompanying language and indications about future policy potentially as important as the rate move itself.
The larger uncertainty is whether the energy shock proves temporary.
If oil and diesel prices remain elevated, they can raise transportation, manufacturing and distribution costs throughout the economy, adding inflationary pressure far beyond gasoline stations.
If crude prices retreat as Middle East supply routes normalize, pressure on the Fed could ease.
For now, neither outcome is clear.
Oil is climbing, Treasury yields have crossed a level unseen since before the global financial crisis, and investors increasingly expect monetary policy to become tighter rather than easier.
That combination left Wall Street with little reason Tuesday to aggressively buy the dip — and placed Wednesday’s Fed decision at the center of a market already contending with war, inflation, debt concerns and renewed uncertainty surrounding the AI boom.
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