Rising Treasury Yields Put a Damper on the Impact of Tech Earnings

Several mega-cap companies reported their quarterly earnings for Q3 over the past two weeks, with the majority posting better-than-expected results. However, the stock market hasn’t been very kind in response to those results; this pessimistic investor reaction came from unfavorable macroeconomic circumstances highlighted by record-high Treasury yields and persisting conflicts in the Middle East. 

S&P 500 Down 7% from 2023 Highs Amid Rising Treasury Yields

The ongoing government bond market rout continues to drive US Treasury yields higher, propelling them to the highest level in 16 years. The 10-year Treasury yield, which has an inverse correlation with bond prices, went past 5% for a brief period, a level last registered in 2007.

The yield surge comes amid market expectations that the Federal Reserve will keep interest rates “higher for longer” and growing US fiscal worries. Because of their far-reaching effects, rising yields typically hurt other markets like equities and real estate. 

This is because high yields increase borrowing costs for companies, potentially reducing corporate profitability. Additionally, higher bond yields can make bonds more appealing relative to stocks, leading some investors to shift their investments away from equities, which can put downward pressure on stock prices. 

The promise of guaranteed yields on US government debt pushed investors away from equities recently, sending the S&P 500 index tumbling approximately 7% from its 2023 highs. In the meantime, the surge in mortgage rates to 20-year highs is pressuring real estate prices. 

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Meta Shares Down Despite Strong Q3 Report; Investors Brace for New Economic Data

The latest upswing in Treasury yields comes during an important week for Wall Street, during which several Big Tech giants reported their most recent quarterly earnings.

After Microsoft (NASDAQ: $MSFT), Facebook owner Meta Platforms’ (NASDAQ: $META) Q3 report smashed analyst’s expectations on top and bottom lines. The company’s revenue in the third quarter jumped by 23% year-over-year, representing the fastest growth rate since 2021. Earnings per share (EPS) came in at $4.39, significantly above the consensus estimates of $3.63. 

However, despite a robust quarterly report, shares of Meta fell more than 4.1% on Wednesday and dropped an additional 3% in Thursday’s premarket. The negative reaction was due to investors being increasingly worried about the current macroeconomic environment, especially mounting yields and low chances that the Fed will begin cutting rates soon. 

In addition, Meta’s forecast for 2024 spending exceeded estimates, with the company also suggesting the ongoing conflict in the Middle East could hinder Q4 sales. 

But it was not only Meta that felt the pressure of rising yields and the current geopolitical tensions but rather the broader stock market. Other mega-cap equities such as Microsoft and Amazon also fell in the Thursday premarket by 0.7% and 1.4%, respectively. Tesla, which revealed disappointing earnings last week, was down 2.5% at the time of writing. 

Investors are bracing for a new batch of economic data, including September’s durable goods, preliminary estimates of Q3 gross domestic product (GDP) growth, and weekly jobless claims. Meanwhile, the market sees a 97% chance that the Fed will maintain its interest rates at the following policy meeting on November 1. 

Do you think the latest stock drop is a temporary blip or a potential beginning of a longer bear market? Let us know in the comments below.