Oil's slide to a four-month low pulled down bond yields. Tech stocks sold off on valuation anxiety, diverging from the rate-driven relief in Treasuries.
U.S. bond yields tumbled Wednesday as oil fell to its lowest since January, cooling inflation expectations that had built through the first quarter. The relief in rates did not extend to equity markets. The S&P 500 and Nasdaq Composite both closed lower, dragged down by technology stocks. The Dow Jones Industrial Average eked out a gain, helped by lower tech exposure.
Oil prices extended a recent slide driven by easing supply fears and softer demand signals. The drop in crude pulled down breakeven inflation rates, which track bond market expectations for future price growth. The 10-year Treasury yield fell, with the move accelerating through the afternoon. The two-year note yield also declined, steepening the yield curve. Fed funds futures showed increased expectations of rate cuts over the coming months, traders said. The market now prices in roughly two quarter-point cuts by year-end, according to CME data.
Technology megacaps bore the brunt of the equity selling. Shares of Apple fell. Microsoft and Nvidia also declined. The weakness came even as lower yields typically support growth stocks by reducing the discount rate on future earnings. The divergence suggests that valuation concerns, not macro sentiment, drove the selling.
The S&P 500 lost ground, and the Nasdaq dropped more than 1%. Financial and energy stocks held up better. Banks benefited from lower rates. Energy shares were mixed on the oil decline.
The dollar weakened alongside yields. Lower interest rates reduce the carry advantage of U.S. assets, pushing the greenback lower. The euro and yen both gained. Commodity-linked currencies like the Australian dollar also rose. Gold edged higher, benefiting from the rate and currency moves.
The tech sector's valuation has been a point of contention. The Nasdaq's forward price-to-earnings multiple sits at levels that have preceded pullbacks before, analysts have noted. Wednesday's selloff could be the market starting to price in that risk, several traders said.
Easing inflation pressure is positive for bonds and stocks with high rate sensitivity. It also signals a slowing economy. Tech shares, after a strong rally to start the year, have little cushion on valuation. The mix leaves equities exposed to any data surprise.
The yield on the 10-year note settled near its session low, according to Tradeweb data.
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