It has been a bumpy stretch for U.S. stocks. Over the past two trading sessions, the Dow Jones Industrial Average and the S&P 500 have dipped, and Nasdaq futures pointed lower heading into Wednesday's session, as investors weighed two forces pulling in the same direction: rising oil prices and climbing bond yields.
Crude oil has been testing the $100-a-barrel level, driven by the ongoing conflict connected to Iran that has kept regional supply chains under strain for months. At the same time, the yield on the 10-year Treasury note, a benchmark that influences everything from mortgage rates to corporate borrowing costs, has moved close to its highest level in roughly two decades. Yields rise when bond prices fall, and the move reflects investors demanding more compensation to hold longer-term government debt at a moment when both inflation and interest-rate uncertainty are elevated.
The combination puts pressure on stocks from two directions at once. Higher oil prices raise costs for companies that rely on fuel, transportation, or petroleum-based materials, squeezing profit margins. Higher Treasury yields, meanwhile, make bonds a more attractive alternative to stocks for income-focused investors and raise the discount rate used to value future corporate earnings, which tends to weigh especially on shares of fast-growing technology companies that are valued heavily on profits expected years from now.
Markets are also digesting the growing likelihood that the Federal Reserve could raise interest rates at its September 16 meeting rather than hold steady, a shift in expectations that itself has contributed to the recent volatility. Traders are watching upcoming economic data releases for signs of whether inflation pressures are easing or building, since either outcome could move both stock and bond markets sharply in the days ahead.
Investors are watching for further movement in oil prices and Treasury yields this week, along with any fresh economic data that could shift the odds on the Fed's September 16 decision.
Why do higher bond yields hurt stocks?
Higher yields make bonds more attractive relative to stocks and raise the rate used to value future corporate profits, which tends to weigh most heavily on growth-oriented shares.
What is driving oil prices higher?
An ongoing conflict connected to Iran has disrupted regional supply chains, keeping crude oil prices elevated and near the $100-a-barrel level.