The S&P 500 fell slightly on Monday as a big week of earnings kicked off, with Bank of America posting better-than-expected results, while traders kept an eye on rates.
The benchmark index declined by 0.4%, while the Dow Jones Industrial Average lost 111 points, or 0.3%. The Nasdaq Composite fell 0.8%.
The declines came after the 10-year Treasury yield on Monday reached its highest level since late 2018, trading at 2.884% at one point. The yield was at 1.71% to begin March, but has shot higher as the Federal Reserve pivoted to a more aggressive tightening stance. That change has weighed on stocks and triggered concerns about an impending recession.
“The big concern is how consistently and how far the 10-year note will rise,” said Sam Stovall, CFRA’s chief investment strategist. “Nothing is really new on the Ukraine front, nothing is really new on the inflation front, the Fed is expected to raise by 50 basis points at its next meeting. So really, the question is, what are the bonds doing?”
Shares of Big Tech companies including Amazon, Meta Platforms, Apple and Microsoft edged lower. Netflix shares fell 2.7%. Tech stocks tend to fall as yields rise because growth-oriented companies are more likely to give investors higher returns in the distant future than in the near term.
Software companies led tech declines. Datadog fell more than 6%, and Zoom Video and Docusign lost about 5%. Okta and Workday fell 4%. EV makers Lordstown Motors, Lucid and Fisker each lost about 5%.
“Volatility in the bond market is simply too high right now, keeping investors that would otherwise capitalize on the recent increase in long term bond yields on the sidelines,” Zachary Hill, head of portfolio management at Horizon Investments, told CNBC. “Until bond market volatility subsides, we expect mega cap tech and the most expensively valued growth sectors of the equity market to remain under pressure.”
Company earnings were the other main market driver Monday, Stovall added. He noted defensive and inflation hedge stocks have seen an improvement in earnings expectations, while growth areas have seen reductions in first quarter estimates. Those reductions have been minor however, he added, saying it’s too early to make major revisions.
“Right now the market is correcting in time,” Stovall said. “The market can correct in time or in price, and if it’s done in time, it means that it’s allowing earnings to catch up.”
Charles Schwab was the top decliner in the S&P, posting an 8% loss after the discount broker reported a quarterly miss on earnings and revenue estimates for the first quarter. Bank of New York Mellon shares fell more than 3% after the company reported lower profits for the first quarter.
Didi shares lost 14% after the Chinese ride-hailing company reported a 12.7% drop in fourth-quarter revenue. Other U.S.-traded Chinese stocks posted significant losses as well. The KraneShares CSI China Internet ETF was down by 3.2%.
Meanwhile, Bank of America reported quarterly results Monday showing a 13% year-over-year drop in earnings per share, though the results were slightly higher than expected. The stock gained 2.1%. Shares of fellow big banks JPMorgan Chase and Wells Fargo rose more than 1%. Citi rose 3.6%. Synchrony Financial shares added 4.7% after the company reported an earnings beat.
Technology bellwethers are set to report quarterly earnings this week, with Netflix due on Tuesday and Tesla out on Wednesday. Snap reports Thursday. United Airlines, American Airlines and Alaska Air are also on the calendar, as are railroads CSX and Union Pacific. Several Dow blue-chip names also report earnings this week, including IBM, Procter and Gamble, Travelers, Dow Inc, Johnson and Johnson, American Express and Verizon.
Investors will be paying close attention to forward guidance, especially for comments on how companies are handling surging costs. March’s consumer price index reading released last week showed an 8.5% increase from a year ago, the fastest annual gain since December 1981.
“The odds seem to be long against underlying inflation moderating to an acceptable pace without a significant deceleration of demand growth,” 22V Research’s Gerard MacDonell said in a note Sunday.
Earnings season is off to a decent start with 81.5% of S&P 500 companies reporting earnings per share above expectations according to FactSet. About 7.5% of the benchmark has reported results so far and analysts believe first-quarter earnings will jump 5.3% for the quarter when all S&P 500 companies finish reporting, according to FactSet’s analysis of actual results and future estimates.
Morgan Stanley analysts say earnings reports for the first quarter could end up being more disappointing that expected.
“Earnings revisions breadth for the S&P 500 has resumed its downtrend over the past two weeks and is once again approaching negative territory,” the firm’s equity strategist Michael Wilson said in a note Monday. “The Morgan Stanley Business Conditions Index (a survey of our industry analysts) fell to its lowest level since April of 2020, and margin expectations look overly optimistic for the balance of ’22 given the myriad of cost pressures companies face.”
Elsewhere, Twitter shares were up 4.7% at about $46.09 per share. The move comes after Twitter announced Friday that the board adopted a limited duration shareholder rights plan, often referred to as a “poison pill.” The move comes after billionaire Elon Musk offered to buy the company for $43 billion.
—With reporting by CNBC’s Patti Domm, Hannah Miao and John Melloy.