U.S. stocks struggle to find footing as bond yields continue rise

See: Rising yields put S&P 500 on pace for biggest monthly loss of 2023 as investors brace for Fed Chair Powell’s Jackson Hole speech

What’s driving markets

Stock-market bulls were striving to find their footing as Wall Street comes off a three-week losing streak.

“The recent jump in interest rates has proven to be too much too fast for stocks to absorb, especially for the heavyweight and longer-duration technology sector. Deteriorating economic conditions in China and weak seasonal trends have been additional factors behind the selling pressure,” Adam Turnquist, chief technical strategist at LPL Financial, said in emailed comments.

Investors shouldn’t panic, Turnquist added. “With volatility comes opportunity, and as valuations reset, overbought conditions recede, and support is found, we believe a buying opportunity back into this bull market will present itself over the coming months.”

The tech sector was holding on to gains on Monday, but has led the way lower for stocks in August, off around 7% for the month to date.

A trimming of interest rates over the weekend by China’s central bank underwhelmed the market, with China’s CSI 300 index 
XX:000300
down 1.4% to start the week.

Read: Another Wall Street bank cuts China growth forecast as rate moves disappoint

The 10-year Treasury yield
BX:TMUBMUSD10Y
pushed back above 4.3%, trading at its highest since 2007.

Rising yields have been a particular problem for some of the big technology stocks that tend to lead the market, according to Innes.

Rising bond yields can make stocks look less attractive to investors. That can be particularly true for tech stocks, whose lofty valuations are typically based on expected earnings far into the future. The 2023 stock-market rally has been largely led by a small cohort of megacap, tech-oriented shares.

With that in mind, the reception afforded Nvidia’s results, due on Wednesday, may shape market sentiment for a while, analysts said. Nvidia has led S&P 500 gainers in 2023, and remains up more than 200% for the year to date.

Also see: Nvidia earnings to offer first true glimpse of the AI windfall

The chip maker, whose upside earnings surprise earlier this year helped spark a frenzy for artificial-intelligence-oriented stock-market plays, is among the last to report in an earnings season that has generally beaten forecasts but failed to deliver additional bullish propulsion to the market.

Need to Know: The history of companies with Nvidia-like valuations isn’t a good one

“This picture simply means that the fear of a further Fed tightening, prospects of higher interest rates, combined [with] the set of bad news from China simply didn’t let investors enjoy the better-than-expected earnings,” said Ipek Ozkardeskaya, senior analyst at Swissquote Bank.

Losses for the Dow were paced by shares of Johnson & Johnson
JNJ,
-2.16%,
down 2.3% after the drug maker said its $35 billion exchange offer for Kenvue that expired last Friday was substantially oversubscribed. Shares of Dow component Goldman Sachs Group Inc.
GS,
-1.46%
were down 1.5%.

See: Goldman Sachs may sell unit with $29 billion in assets

However, Tom Lee, head of research at Fundstrat, reckoned the recent selloff will be halted at or before Federal Reserve Chairman Jay Powell makes a speech at the Jackson Hole symposium at the end of the week.

“Over our many conversations with institutional investors in the past week, the vast majority cite the rise in interest rates as the most concerning for equities,” Lee wrote in a note published over the weekend.

And he thinks the Fed is worried by the surge in 10-year yields, too, because it represents a meaningful tightening of financial conditions for markets, companies and households.

“I think the Fed likely says something dovish-ish [sic]. Why? Does Fed want to risk another ‘something breaking’ ala Feb 2023? While some look back at August 2022 when Fed Chair Powell’s statement was hawkish and marked the local top in 2022 (stocks fell -19% next 8 weeks), we think the context is the opposite.” Lee concluded.

Check out: Jackson Hole: Fed’s Powell could join rather than fight bond vigilantes as yields surge

Companies in focus

• Shares of Palo Alto Networks Inc.
  PANW,
  +15.90%
  jumped 16% after the cybersecurity company late Friday reported results that topped expectations with its latest earnings, as well as with its forecasts for profit and billings, outlining that new reporting rules and AI-backed adversaries are driving adoption.

• Tesla Inc.
  TSLA,
  +5.83%
  shares rose 4.4%, on track for its first winning session in seven, after Baird analyst Ben Kallo said price cuts and their impact on margins will drive the narrative for the electric vehicle maker in the second half. 

• Nikola Corp.
  NKLA,
  -21.43%
  shares fell 21.7% after the electric truck maker said it plans to offer $325 million in senior convertible bonds in a registered direct offering. Nikola also updated its recent voluntary recall of more than 200 of its electric vehicles after investigating their battery packs.

• Shares of AMC Entertainment Holdings Inc.
  AMC,
  -23.84%
  fell 24.2% Monday ahead of the company’s planned stock conversion. The conversion of AMC Preferred Equity units
  APE,
  -7.27%
   will result in the trading of a single AMC common share class. AMC is also planning a reverse 1-for-10 split of its common stock and an increase in its authorized common shares.