US stocks fell on Tuesday as investors looked ahead to the Federal Reserve’s interest-rate decision and rising Treasury yields added pressure to equity valuations.
The Dow Jones Industrial Average fell 330.74 points, or 0.63%, to 52,090.46.
The S&P 500 dropped 0.45% to 7,585.51, while the Nasdaq Composite declined 0.77% to 25,983.58.
The broader decline came as investors assessed the potential impact of higher interest rates, rising oil prices and inflation concerns linked to the ongoing US-Iran war.
Treasury yields climb to highest level since 2007
The benchmark 10-year Treasury yield reached 5.041% on Tuesday, its highest level since 2007, before easing slightly. It later traded more than 5 basis points higher at 5.012%.
Treasury yields have remained a key focus for equity markets as government bonds have sold off amid concerns that higher energy prices could fuel inflation and encourage central banks to maintain a hawkish policy stance.
Higher rates are also increasing pressure on heavily indebted companies, including businesses that have made significant investments in artificial intelligence infrastructure.
Barclays strategists said higher rates were increasingly creating risks for equity portfolios after already weighing on valuations.
The approach of the 5% threshold for 10-year Treasury yields was also identified as an important point for stocks because rates above that level have historically become a more persistent headwind for equities.
Despite the broader market weakness, several AI-linked stocks recovered from recent declines. Coherent gained more than 1%, AMD rose 2%, and Qualcomm advanced 5%.
Oil prices add to inflation concerns
Oil prices extended their gains on Tuesday after Saudi Arabia shut a key pipeline that bypasses the Strait of Hormuz following attacks on its energy infrastructure.
Brent crude futures for November delivery rose 3% to above $109 a barrel, while West Texas Intermediate futures gained 5% to above $106. .
The latest move has added to concerns that higher fuel prices could feed into broader inflation and put further pressure on monetary policy.
Front-month WTI and Brent futures ultimately settled 4.4% and 2.9% higher, respectively, while diesel futures reached a record high.
The rise in energy prices has also intensified concerns about the economic impact of the ongoing Middle East conflict and the possibility that inflationary pressures could persist.
Fed decision takes centre stage
The Federal Reserve began its two-day monetary policy meeting, with its rate decision due Wednesday. Markets were pricing in a strong probability of a 25-basis-point increase from the current 3.5%-3.75% target range.
CME’s FedWatch tool showed expectations for a rate hike had risen sharply from 33.1% a month earlier, reflecting hotter inflation data and a significant increase in US crude prices over the past two weeks.
A rate increase would be the first in more than three years, according to the supplied data.
Investors are also assessing how policymakers could respond to continued energy-price pressures.
The potential for further rate increases could keep pressure on equities if higher oil prices contribute to broader inflation.
Bitcoin weakness and the Senate’s failure to advance comprehensive cryptocurrency legislation also weighed on crypto-related stocks, with Coinbase and Strategy closing sharply lower.
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