“While that might be fair in the big picture, markets are always concerned with the velocity of the move rather than the overall level, and the fact that stocks didn’t flinch in the face of those moves suggested complacency,” Krinsky said. “Whether this is the start of the pre-election jitters or not, we continue to see downside risk for equities broadly over the coming weeks, with an SPX pullback into the 5,500-5,650 zone a decent probability.”

The price of options that protect against an extended slump in Treasuries has soared to the highest this year amid concerns that losses may deepen.

Meantime, swap prices reflect less than a 100% certainty that the central bank reduces rates at each of its two remaining policy meetings this year. The bond market is also trimming bets on the degree of Fed rate reductions over the next year.

“The price of options to hedge against Treasury losses is soaring,” said Andrew Brenner at NatAlliance Securities. “In the US, it is about the election and potential sweep. That is what is being built into the rate structure, which is giving the vigilantes the green light. It will reverse, but it might take a severe employment number or a surprise in the election.”

“We would caution investors from reading too much into the recent rise in bond yields,” said Tiffany Wilding at Pacific Investment Management Co. “Over the past six major Fed rate-cutting cycles, the change in the 10-year Treasury yield a month after the first cut has not provided a consistent signal about the magnitude of further cuts or whether the Us economy falls into recession.”

In fact, yields rose in the month after the first cut more often than not, she noted.

“Equity market performance in the first month after the Fed starts cutting has been a similarly bad predictor of future economic performance (and market returns),” Wilding said. “Equities, more often than not, have tended to rise in the month after a cutting cycle begins, despite more significant divergence as time goes on.”

Looking at the same starkly different cycles of 1995 and 2007, equity returns (proxied by the rate-sensitive Russell 2000 of small caps) in the month after the first cut were positive in both cycles (at 4.6% and 6.9%, respectively), Wilding said. However, equity market performance was down 4.4% in the year after the 2007 cut, while it was up 21% in the year following the 1995 adjustment.

“Even with the recent move in 10-year Treasury yields, we remain bullish on US large caps,” said Nicholas Colas at DataTrek Research. “History says to discount the idea that rates will blow out because of deficit worries, at least over the near term. Instead, we see higher yields as a sign that economic growth remains robust and corporate earnings growth should continue over the coming quarters.”

“All else equal, the more rate cuts that are removed for next year the less of an outlier reading it becomes for the market to achieve 15% earnings growth,” said Ryan Grabinski at Strategas. “However, additional rates cuts do not change the challenges the S&P faces with achieving that growth rate.”

Sales growth continues to show signs of slowing, and if analysts were suggesting rate cuts would reduce interest expense, that argument is beginning to recede, Grabinski said.

“Nearly 14% EPS margins continue to look more and more difficult to achieve,” he added. “The question is when does something give.”

To Jose Torres at Interactive Brokers, the equity market is extremely fragile considering the headwinds that are lurking right around the corner.

“Earnings expectations are buoyant for next year, which increases the importance of forward guidance rather than past results,” he said. “When considering that valuations are around 22 times next year’s profits, any disappointment in the outlook for the bottom line can significantly impact stock market performance.”

Corporate Highlights:

• Boeing Co. will likely continue to burn cash next year as it grapples with the challenges of ramping up production again following a prolonged labor strike and regulatory scrutiny over its factory processes.

• AT&T Inc. gained more mobile subscribers in the third quarter than analysts expected, continuing the winning streak from the previous period.

• Hilton Worldwide Holdings Inc. lowered its profit outlook, as the addition of new hotels to its global system failed to offset slower travel demand.

• Coca-Cola Co. dropped as investors weighed how much longer the soft-drink purveyor could raise prices without getting customers to buy more of its beverages.

• Spirit Airlines Inc. is in talks with Frontier Group Holdings Inc. about filing for bankruptcy to facilitate a takeover by the rival discount carrier, according to people with knowledge of the matter.

• Capital One Financial Corp.’s proposed $35 billion acquisition of Discover Financial Services is being investigated by New York Attorney General Letitia James, who said the deal would have “significant impact” on consumers in the state.

• Deutsche Bank AG said it will have to set aside more money than expected for souring debt, the second time this year it had to adjust its guidance.

• Kering SA warned that its annual profit will fall to the lowest level since 2016 as a slump in Chinese demand for luxury goods hampers a turnaround of the French fashion group’s biggest label, Gucci.

Key events this week:

• US new home sales, jobless claims, S&P Global Manufacturing and Services PMI, Thursday

• UPS, Barclays earnings, Thursday

• Fed’s Beth Hammack speaks, Thursday

• US durable goods, University of Michigan consumer sentiment, Friday

Some of the main moves in markets:

Stocks

• The S&P 500 fell 0.9% as of 4 p.m. New York time

• The Nasdaq 100 fell 1.6%

• The Dow Jones Industrial Average fell 1%

• The MSCI World Index fell 0.9%

• Bloomberg Magnificent 7 Total Return Index fell 2.1%

• The Russell 2000 Index fell 0.8%

Currencies

• The Bloomberg Dollar Spot Index rose 0.2%

• The euro fell 0.1% to $1.0786

• The British pound fell 0.4% to $1.2933

• The Japanese yen fell 1% to 152.58 per dollar

Cryptocurrencies

• Bitcoin fell 1.6% to $66,416.63

• Ether fell 4.7% to $2,509.01

Bonds

• The yield on 10-year Treasuries advanced three basis points to 4.23%

• Germany’s 10-year yield declined one basis point to 2.30%

• Britain’s 10-year yield advanced three basis points to 4.20%

Commodities

• West Texas Intermediate crude fell 1.1% to $70.98 a barrel

• Spot gold fell 1.2% to $2,716.54 an ounce

This story was produced with the assistance of Bloomberg Automation.

Most Read from Bloomberg Businessweek

©2024 Bloomberg L.P.