Rising Treasury Yields Spark Equity Pullback, But Fed Optimism Offers Cushion

Monday’s equity selloff painted a mixed picture of market sentiment, with major indices taking measured steps backward as bond yields climbed higher. The S&P 500 Index slipped -0.35%, the Dow Jones Industrials declined -0.45%, and the Nasdaq 100 retreated -0.25%. December contract futures followed suit, with E-mini S&P 500 futures falling -0.35% and E-mini Nasdaq futures down -0.27%.

The culprit behind the equity weakness was unmistakable: Treasury yields surged to multi-week highs. The 10-year Treasury note yield hit a 2.25-month peak of 4.19% before settling at 4.17%, up +4 basis points for the session. This bond market repricing reflects growing expectations around the Fed’s policy trajectory heading into this week’s crucial policy meeting.

Yet despite the near-term pressure, equities found meaningful support from a pair of powerful tailwinds. First, markets are pricing in a 99% probability that the Federal Reserve will deliver another -25 basis point rate cut when the 2-day FOMC meeting concludes Wednesday, potentially bringing the federal funds target range to 3.50%-3.75%. This dovish expectation has kept equity losses contained, as investors balance near-term yield pressures against longer-term rate-cut prospects. Second, calendar seasonality continues to favor stocks, with December historically a bullish period for equities.

Corporate Action Steals the Spotlight

While macroeconomic crosscurrents dominated headlines, the mergers and acquisition activity provided genuine bright spots. International Business Machines’ announced acquisition of Confluent for approximately $11 billion ignited a stunning +29% rally in the software company’s stock. Meanwhile, S&P Dow Jones Indices’ announcement that Carvana would join the S&P 500 effective December 22—replacing LKQ Corp—sent the online auto retailer surging more than +12%.

Paramount Skydance launched a hostile takeover bid for Warner Bros Discovery at $30 per share, besting Netflix’s previous offer of $27.75 and lifting Warner Bros Discovery +4% to lead Nasdaq gainers. Additional index additions boosted CRH Plc more than +5%.

Semiconductor Strength Anchors Tech

The chip sector emerged as a key stabilizing force for technology-heavy indices. Micron Technology surged more than +4%, while ON Semiconductor climbed +3%. Microchip Technology, Broadcom, GlobalFoundries, Lam Research, ASML Holding, Nvidia, and Advanced Micro Devices all posted gains exceeding +1%, providing meaningful support to the Nasdaq 100 during the broad-based retreat.

Earnings Beat Expectations; Seasonals Improve Outlook

With 495 of 500 S&P 500 companies having reported Q3 results, Bloomberg Intelligence data reveals an impressive +83% of companies have beaten forecasts, tracking for the strongest quarter since 2021. Q3 earnings surged +14.6% year-over-year, substantially outpacing initial expectations of +7.2%. This earnings resilience suggests corporate health remains solid despite macroeconomic headwinds.

A Week of Critical Economic Tests

The coming week will test market resilience with several significant data releases. Tuesday brings October JOLTS job openings data (expected +7,150 increase), while Wednesday features the Q3 Employment Cost Index forecast (+0.9%). Thursday will deliver weekly initial unemployment claims, anticipated to rise by +29,000 to 220,000.

The Fed’s post-meeting communication will prove particularly market-moving. Beyond announcing the anticipated rate cut, Fed Chair Powell’s Wednesday comments regarding future policy direction could materially shift investor expectations. Investors will also scrutinize the Fed’s Summary of Economic Projections and updated dot-plot for signals about the terminal policy rate.

Global Markets and Rate Dynamics Shift

Internationally, markets built on Monday’s momentum. China’s Shanghai Composite rallied to a 2-week high, closing +0.54%, buoyed by mixed trade data: November exports rose +5.9% year-over-year (exceeding +4.0% expectations), though imports lagged at +1.9% (below +3.0% forecasts). Japan’s Nikkei Stock 225 advanced +0.18%, and the Euro Stoxx 50 edged +0.03% higher.

Treasury market dynamics reflected supply pressures as the Treasury prepares to auction $119 billion in T-notes and T-bonds this week. Japanese bond weakness—with 10-year JGB prices sliding to 18-year lows amid BOJ rate-hike speculation—exerted negative spillover effects on U.S. Treasuries. However, robust demand for the $58 billion 3-year note auction (bid-to-cover ratio of 2.64) provided temporary support.

European government bond yields marched significantly higher. Germany’s 10-year bund yield climbed to an 8.5-month peak of 2.876%, finishing +6.3 basis points higher at 2.862%. The UK’s 10-year gilt yield rose to a 1.5-week high of 4.546%, ending +5.2 basis points higher at 4.528%. ECB Executive Board member Isabel Schnabel indicated the central bank remains “rather comfortable” with market expectations of an ECB rate increase at the December 18 policy meeting.

Individual Movers: Winners and Cautionary Tales

Beyond semiconductor strength, clinical trial success propelled Kymers Therapeutics higher, with the stock surging more than +41% following positive Phase 1b results for KT-621 in atopic dermatitis treatment.

Conversely, downgrade avalanches weighed on select names. Air Products and Chemicals led S&P 500 decliners with a -9% drop following announcements of ammonia-focused partnership efforts with Yara International. Marvell Technology fell more than -6% after Benchmark Company LLC downgraded the semiconductor name to hold. Additional weakness emerged in Tesla (Morgan Stanley downgrade to equal weight, -3%), Range Resources (JPMorgan downgrade to underweight, -4%), Boston Scientific (Nephron Research downgrade to hold, -3%), Rivian Automotive (Morgan Stanley downgrade to underweight, -2%), Lennar (Barclays downgrade to underweight, -2%), and CoreWeave (equity offering announcement, -2%).

The market’s current state reflects a delicate balance: near-term bond yield headwinds are being tempered by the promise of Fed accommodation and solid earnings fundamentals, with portfolio flows increasingly driven by M&A activity and sector rotation dynamics.