U.S. stocks end mostly down, S&P 500 posts third straight weekly loss on rising yields, China worries

What drove markets

U.S. stocks ended mostly lower Friday after a recent rise in Treasury yields to the highest level in more than 15 years.

The big story in markets has been the deteriorating value of longer-duration government bonds, with the 10-year Treasury yield
BX:TMUBMUSD10Y
climbing for a fifth straight week to finish Friday at 4.251%, according to Dow Jones Market Data. The rate fell on Friday but equities remained under pressure after the 10-year yield on Thursday reached its highest level since 2007.

The recent jump in yields is “roiling the market,” said Scott Wren, senior global market strategist at Wells Fargo Investment Institute, in a phone interview Friday. This week’s decline in stocks is “mainly tied to higher yields and the potential for the Fed to do more” tightening of its monetary policy to bring down inflation. 

“For us, there’s more downside here” in stocks after a large rally earlier this year said Wren, pointing to Wells Fargo Investment Institute’s expectation for the S&P 500 index to end 2023 at 4,100. That’s around 6% lower than the index’s closing level on Friday.

“A few months ago if we were to predict a pullback in the equity market we’d say the catalyst was recession,” said David Donabedian, chief investment officer of CIBC Private Wealth US. “Instead, the August pullback is driven by equity investors concern over the bond market and China. Bond yields have surged higher, making investors nervous.”

“Investors are concerned that if bond yields continue going higher, the economy is too strong and the Fed will need to raise interest rates further. And with the bond yield high enough, that poses competition for equity investors who feel the bond market is less risky than the stock market right now,” he said, in emailed comments, while noting that even with the current pullback, the market is still up for the year.

The S&P 500 has risen 13.8% so far in 2023, FactSet data show.

Most of the recent unwind in the stock market has been tied to tech-related companies that had gotten a lift from the exuberance surrounding artificial intelligence, said Dave Grecsek, managing director in investment strategy and research at Aspiriant, in a phone interview Friday. That reset is “healthy,” as it has removed some of the froth from the U.S. stock market, he said.

Need to Know: Bond yields hold the key to an emotional market that can change on a dime, says this strategist

Market attention also is focused on China, after builder Evergrande filed for bankruptcy protection in U.S. courts, and the People’s Bank of China stepped in to help its beleaguered currency.

Worries about the solvency of Evergrande’s sector peer Country Garden “haven’t helped either, along with worries over contagion to the shadow banking system, after Chinese asset manager Zhonghzi missed a coupon payment, has added to the uncertainty,” said Michael Hewson, chief market analyst at CMC Markets UK, in a note.

See: Global investors expect China to deliver a massive fiscal stimulus. Here’s why it may never arrive.

There was no U.S. economic data released on Friday, ahead of next week’s gathering of Federal Reserve officials in Jackson Hole, Wyoming.

Companies in focus

• Deere & Co. 
  DE,
  -5.28%
  stock dropped 5.3% despite the farm equipment maker’s third-quarter profit and its 2023 guidance beating analyst estimates.

• Applied Materials Inc.
  AMAT,
  +3.68%
  shares rose 3.7% after the chip industry equipment supplier reported earnings and forecast an outlook that topped Wall Street expectations.

• Shares of Estée Lauder Inc.
  EL,
  -3.31%
  fell 3.3%, after the cosmetics company posted better-than-expected earnings for its fiscal fourth quarter but offered guidance that lagged consensus. 

• U.S.-listed China ADRs were under pressure as the People’s Bank of China boosted its yuan defense and property developer China Evergrande Group filed for bankruptcy protection in New York late Thursday. Shares of JD.com Inc.
  JD,
  -4.75%
  dropped around 4.8%, Bilibili Inc.
  BILI,
  -6.38%
  shed 6.4%, NIO Inc.
  NIO,
  -7.22%
  tumbled 7.2% and Alibaba Group Holding Ltd.
  BABA,
  -2.89%
  fell 2.9%.

Steve Goldstein contributed to this article.