The S&P 500 and Nasdaq eased from record highs on Tuesday as financials were dragged lower by weakness in banks despite better-than-expected quarterly results, while tech gave up some gains following a rebound in U.S. bond yields.
The S&P 500 fell 0.3%, after hitting a record high of 4,392.30 earlier in the day. The Dow Jones Industrial Average slipped 0.29%, or 102 points, the Nasdaq was down 0.3%, easing from its intraday record of 14,803.70.
Major Wall Street banks kicked off the quarterly earnings season on Tuesday. JPMorgan Chase & Co (NYSE:JPM) and Goldman Sachs (NYSE:GS) reported second-quarter results that topped analysts’ expectations, but uncertainty over the outlook for loan demand and the backdrop of weaker U.S. bond yields weighed on sentiment.
But financials eased slightly off their the sessions lows of the day thanks to a bounce in bond yields following a 30-year Treasury auction that pointed to signs of soft demand for bonds, pressuring prices, which trade inversely to yields.
“The auction results suggest some discomfort with 30-year yields below 2% and the heavier than average Dealer takedown suggests that there will be more bonds for sale post-auction than usual,” Jefferies (NYSE:JEF) said in a note.
Ahead of the auction U.S. bond yields were on the backfoot earlier as investors shrugged off another upside surprise in inflation as transitory.
“The largest year-over-year increase in the headline and core CPI since 2009 and 1991, respectively, much of the uptick in costs continues to reflect a reopening of the economy apparel, autos, and travel – accounting for the majority of rise,” Stifel said.
The move higher in inflation could be sustained by the reopening of the economies globally once the Delta variant peaks and global vaccinations gather pace.
“There have been a few fits and starts with what's gone on in Japan with the Delta variant of COVID, but I think that the reopening is real on a global basis, and it should lead to inflation going forward,” Darren Schuringa, CEO of ASYMmetric ETFs said in an interview with Investing.com on Tuesday.
The sudden move higher in yields, meanwhile, reined in some bullish bets on tech.
Facebook (NASDAQ:FB), Google-parent Alphabet (NASDAQ:GOOGL), Microsoft (NASDAQ:MSFT, Apple (NASDAQ:AAPL), and Amazon.com (NASDAQ:AMZN) traded mixed.
Looking further ahead, the higher valuations in tech could keep a lid on demand for growth stocks, particularly against a backdrop of somewhat cheaper cyclicals stocks, which tend to perform well during the early stages of a recovery relative to growth.
“In the early stages of a recovery, value stocks tend to do better,” according to Schuringa. "I think that investors looking to de-risk their portfolio and equity exposure, wouldn’t mind taking some of their tech gains off the table. Hopefully, by investing in companies that haven't had the same run higher [as tech has], investors can lower their downside risk in the portfolio versus increasing it by either holding their positions or adding to them to protect."