Wall Street has been on a hot streak. The S&P 500 climbed above 7,800 for the first time this week, and the Nasdaq Composite notched fresh record highs, with the rally fueled by a strong US jobs report last week and a round of solid quarterly earnings. On Thursday, that streak paused.
Global equity benchmarks slipped as surging crude oil prices and escalating Middle East tensions revived worries about stagflation, a combination of slowing growth and rising prices that investors generally try to avoid. The MSCI All Country World Index, a broad gauge of stocks worldwide, retreated about 0.2% from its recent peak, and Wall Street futures and major Asian markets followed the same pattern overnight.
The move showed up most clearly in the bond market. The yield on the 10 year US Treasury note, which rises when bond prices fall, briefly touched 5.36% before settling back near 5.28%, a notably elevated level that reflects investors demanding more compensation to hold government debt amid the uncertainty. Higher yields also tend to make borrowing more expensive across the economy, from mortgages to corporate loans, which is part of why stock investors watch them so closely.
Earlier in the week, the mood had been markedly calmer. On Tuesday, the Dow Jones Industrial Average, the S&P 500, and the Nasdaq Composite all finished in positive territory, with chipmakers leading the gains and easing worries about oil supply helping sentiment. The S&P 500 closed at 7,801.77 that day, just above the 7,800 mark for the first time, while strong import data pointed to resilient underlying economic activity.
Thursday's pullback was a reminder that even a market riding high on optimism about artificial intelligence investment and a resilient economy remains sensitive to swings in energy prices and geopolitical risk, especially when they arrive together.
Oil prices and the 10 year Treasury yield are the two numbers worth watching in the days ahead, since both tend to move quickly if Middle East tensions either ease or intensify further.
Why do rising bond yields matter for stocks?
Higher yields make borrowing more expensive across the economy and can make bonds more attractive relative to stocks, which is why equity investors watch Treasury yields closely.
What had been driving the stock rally before Thursday?
A strong US jobs report and solid quarterly earnings had pushed major indexes, including the S&P 500 and Nasdaq, to fresh record territory.