Technology stocks led a Tuesday sell-off as economic growth expectations, buoyed by lofty spending measures making their way through Congress, drove a staggering increase in yields on the 10-year Treasury—the so-called risk-free asset class—thereby undercutting lofty stock valuations.

Key Facts

The Dow Jones Industrial Average fell 505 points, or 1.5%, to 34,363, as of 11:45 a.m. EDT Tuesday, while the S&P 500 sank 1.7%, putting each index about 3.5% below their all-time highs from this summer.

Led by sharp declines in chipmakers ASML, Applied Materials and AMD, the tech-heavy Nasdaq plunged 2.7%, to 14,582 points, more than 5% below its latest high earlier this month. 

Yields on the 10-year Treasury shot up 3.5 basis points on Tuesday to their highest levels in more than three months, ushering in the tech-focused sell-off by driving investors away from the high-priced sector, market analyst Tom Essaye, president of Sevens Report Research, said in a note.  

In the S&P, ecommerce firm Etsy, vaccine-maker Moderna and social media giant Twitter were among stocks heading up losses, plunging 8%, 6% and 5%, respectively.

Meanwhile, U.S. consumer confidence unexpectedly fell to a seven-month low this month, according to data released Tuesday by the Conference Board, which noted the delta variant’s spread continued to dampen optimism.

Key Background

Rising Treasury yields have coincided with several bouts of market stress this year. In a morning note, analyst Adam Crisafulli of Vital Knowledge Media pointed out yields—still about 50% below pre-pandemic levels—are normalizing and mostly rising for “good reasons,” namely expectations for stronger economic growth. However, that resurgence should prove difficult for tech stocks, which have the most to lose after the Nasdaq’s stunning 43% gain last year. “The pandemic fueled a huge surge in tech stocks,” he said, adding that as the pandemic fades, the forces that pushed the stocks up are “working in reverse.” Pandemic-fueled growth has already started to slow for tech companies, denting their future revenue prospects, and rising yields should only further erode stock prices, Crisafulli notes.

What To Watch For

In a recent note, Morgan Stanley analysts estimated the S&P 500 could be in for an average 18% valuation haircut, relative to earnings, for every 100 basis-point increase in 10-year Treasury yields. So far this year, yields have added about 60 basis points. Stocks most at risk of a decline include recent stay-at-home favorite Zoom Video Communications, at-home fitness firm Peloton and Tesla–all of which trade for at least 100 times earnings.

Chief Critic

“Consumer confidence dropped in September as the spread of the delta variant continued to dampen optimism,” Lynn Franco, a senior director at The Conference Board, said in a statement Tuesday. “Concerns about the state of the economy and short-term growth prospects deepened, while spending intentions for homes, autos, and major appliances all retreated again.

Further Reading

White House Warns U.S. Could Plunge Into Recession If It Hits Debt Ceiling Next Month (Forbes)

Stocks Rally After Fed Sticks To $120 Billion Monthly Stimulus (Forbes)