S&P 500 dips slightly from 4500 level in mixed equity trade amid surging US yields

Major US equity indices were mixed on Friday, with the S&P 500 ending the session flat near 4500, the Dow gaining about 0.5% to trade near 34,750 and the Nasdaq 100 index losing about 1.5% to fall to fresh weekly lows in the 14,300s, where it was testing its 50-Day Moving Average. All major indices ended the week in the red, though the Dow was down only about 0.1%, versus losses of more than 1.0% for the S&P 500 and nearly 3.5% for the Nasdaq 100.

The main driver of the divergence in performance between the Dow and Nasdaq on the final day of the week, and indeed the week in its entirety, has been the sharp rise in US bond yields amid recent hawkish Fed rhetoric. US 10-year yields jumped 30 bps on the week to end above 2.70%, as traders up their bets as to where the Fed’s terminal rate will be. The effect on equities is that stocks with a higher “opportunity cost” to hold, i.e. those whose valuation is based disproportionately more on expectations for future earnings growth rather than current earnings, perform worse.

These are disproportionately tech stocks that crowd the Nasdaq 100 and also dominate the S&P 500. Meanwhile, stocks with a positive correlation to interest rates, such as financials, have performed better. Indeed, the S&P 500 GICS Financials sector was up 1.2% on Friday, the second-best performing sector on the day after Energy, which rallied nearly 3.0%.

While geopolitics remains in the spotlight, Fed policy has returned to the forefront as the dominant equity market theme, and this is set to remain the case next week with investors on notice for the latest US Producer and Consumer Price Inflation readings. Next week also sees the unofficial start to the Q1 2022 earnings season as big US banks start reporting figures.