NEW YORK (AP) โ Wall Street fell Thursday on the prospect of a 5% yield on 10-year Treasury bonds for the first time since 2007.
The S&P 500 lost 36.60 points, or 0.8%, to 4,278.00 following a mixed series of earnings reports from Tesla and other influential companies. The Dow Jones Industrial Average fell 250.91, or 0.7%, to 33,414.17, and the Nasdaq composite sank 128.13, or 1%, to 13,186.18.
Stocks felt pressure from the bond market, where rapidly rising yields have been pressuring Wall Street since the summer. The 10-year Treasury yield touched 4.99%, down from 4.91% on Wednesday, before paring its gain to 4.98%. As a benchmark for much of the financial world, the 10-year yield helps set prices for all types of investments and loans.
Yields swung after the Federal Reserve chair said again that the central bank will watch how the economy and inflation develop before making upcoming interest rate decisions. It has already raised its key overnight interest rate to the highest level since 2001, and the 10-year Treasury yield has been recovering.
The 10-year yield has advanced rapidly from below 3.50% during the spring, as a resilient U.S. economy forces investors to accept a new normal in which the Federal Reserve is likely to keep its main interest rate high for a long time.
Federal Reserve Chair Jerome Powell said in a speech Thursday that if growth in the U.S. economy appears persistently strong, it could push the Federal Reserve to raise rates further. But he also noted that the recent rise in long-term bond yields, such as the 10-year Treasury, has been doing some of the Fed's job of slowing the economy without requiring additional increases.
The Federal Reserve is raising rates in hopes that they will result in less spending across the economy and fuel inflation. Higher 10-year yields make mortgages more expensive, lower investment prices, and make it more expensive for businesses to borrow and grow.
"That's how monetary policy works, that's literally how it works," Powell said of how the Fed's tight monetary policy has led to higher yields, which should hopefully ease pressure on inflation.
Another report was released Thursday showing that the U.S. labor market remains remarkably strong despite much higher rates. Last week, fewer American workers filed for unemployment benefits than expected, indicating low levels of layoffs across the country.
While that's good for an economy that has defied predictions of a recession, it could also add upward pressure on inflation.
However, a separate report said manufacturing in the mid-Atlantic region is weakening more than economists expected. And a third report said sales of previously occupied homes fell last month, although not as much as economists expected. Mortgage rates have risen to their highest levels since 2000.
What happens next to yields and the value of the US dollar will depend on whether the US economy can actually achieve what is called a โsoft landing,โ where growth slows enough to dampen inflation, but not as much as to cause a bad recession. It will also depend on how stiff inflation is after that landing, according to Athanasios Vamvakidis, currency strategist at Bank of America.
Vamvakidis wrote in a BofA Global Research report that he sees risks for yields and the dollar to remain high after the landing, even if both are lower than current levels.
High yields hurt all types of stocks, but they especially affect those that are betting on expectations of high growth in the distant future and those that are considered very expensive. This has often put the spotlight on Big Tech recently, with some reporting a mixed set of earnings.
Tesla fell 9.3% after reporting weaker summer results than analysts expected. It has been cutting prices to boost sales, but that also affects its profitability.
Zions Bancorp. fell 9.7% even though it reported higher-than-expected profits for the latest quarter. It and other banks smaller in size than the industry's largest titans ran into trouble earlier this year after high interest rates helped cause three high-profile bank failures.
At the opposite extreme was Netflix, which jumped 16.1%. It reported stronger fourth-quarter earnings than analysts expected and said it would raise prices on some of its membership tiers to generate more revenue.
American Airlines rose 0.8% after reporting stronger-than-expected profits for the busy summer season. It had fallen sharply a day earlier, when United Airlines warned that high fuel prices and the suspension of flights to Tel Aviv would sharply reduce its profits by the end of the year.
Overall, analysts expect companies in the S&P 500 index to post slight growth in earnings per share over the summer compared to a year ago. If they do, it would be the first such growth in a year.
Meanwhile, crude oil prices rose further after erasing morning losses. A barrel of US crude oil for delivery in November rose $1.05 to close at $89.37. Brent crude added 88 cents to $92.38. per barrel. A day earlier, both rose at least $1.60 on concerns that the war in the Middle East could cause supply disruptions.
In foreign stock markets, indices fell across Europe after falling more sharply in Asia.
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AP Business writers Matt Ott and Elaine Kurtenbach contributed.
