(Bloomberg) — Stocks saw their first back-to-back drop in six weeks as traders weighed prospects of a slower pace of Federal Reserve rate cuts. Treasury 10-year yields hit 4.2%.

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Wall Street are paring back bets on aggressive policy easing as the US economy remains robust and Fed officials have sounded a cautious tone over the pace of future rate decreases. Rising oil prices and the prospect of bigger fiscal deficits after the upcoming presidential election are only compounding the market’s concerns. Since the end of last week, traders have trimmed the extent of expected Fed cuts through September 2025 by more than 10 basis points.

“Of course, higher yields do not have to be negative for stocks. Let’s face it, the stock market has been advancing as these bond yields have bee rising for a full month now,” said Matt Maley at Miller Tabak + Co. “However, given how expensive the market is today, these higher yields could cause some problems for the equity market before too long.”

Exposure to the S&P 500 has reached levels that were followed by a 10% slump in the past, according to Citigroup Inc. strategists. Long positions on futures linked to the benchmark index are at the highest since mid-2023 and are looking “particularly extended,” the team led by Chris Montagu wrote in a note.

“We’re not suggesting investors should start to reduce exposure, but the positioning risks do rise when markets get extended like this,” they said.

The S&P 500 fell 0.2%. The Nasdaq 100 dropped 0.1%. The Dow Jones Industrial Average was little changed. The Russell 2000 of smaller firms slipped 0.3%. Texas Instruments Inc., which gets almost three-quarters of its revenue from industrial and automotive chips, reports results after the market close.

Treasury 10-year yield was little changed at 4.20%. Oil advanced as traders tracked tensions between Israel and Iran. Gold climbed to a fresh record. Options traders are increasing bets that Bitcoin will reach a record high of $80,000 by the end of November no matter who wins the US presidential election.

The stock market has rallied this year thanks to a resilient economy, strong corporate profits and speculation about artificial-intelligence breakthroughs — sending the S&P 500 up over 20%. Yet risks keep surfacing: from a tight US election to war in the Middle East and uncertainty around the trajectory of Fed easing.

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“While recent data indicate a more resilient US economy than previously thought, the broad disinflation trend is still intact, and downside risks — albeit lower — to the labor market remain,” said Solita Marcelli at UBS Global Wealth Management. “We continue to expect a further 50 basis points of rate cuts in 2024 and 100 basis points of cuts in 2025. This should bring Treasury yields lower.”

A string of stronger-than-estimated data points sent the US version of Citigroup’s Economic Surprise Index to the highest since April. The gauge measures the difference between actual releases and analyst expectations.

“On the back of September’s strong economic data, markets have already priced a slower pace of cuts,” said Lauren Goodwin at New York Life Investments. “If the Fed is able to move towards a 4% policy rate — still above the levels most believe represent the ‘neutral’ rate — then the equity market rally can continue. Disruptions to that view make equity market volatility more likely.”

Most Fed officials speaking earlier this week signaled they favor a slower tempo of rate reductions. Policymakers at their meeting last month began lowering rates for the first time since the onset of the pandemic. They cut their benchmark by a half percentage point, to a range of 4.75% to 5%, as concern mounted that the labor market was deteriorating and as inflation cooled close to the Fed’s 2% goal.

“We can point to a few reasons for the rise in global long rates but one possibility is that markets are giving a big thumbs down to central banks easing policy before we’ve seen a sustainable drop in inflation.” said Peter Boockvar author of The Boock Report. “I remain bearish on the long end and bullish on the short end.”

The last time US government bonds sold off this much as the Fed started cutting interest rates, Alan Greenspan was orchestrating a rare soft landing.

Two-year yields have climbed 34 basis points since the Fed reduced interest rates on Sept. 18 for the first time since 2020. Yields rose similarly in 1995, when the Fed — led by Greenspan — managed to cool the economy without causing a recession.

In prior rate cutting cycles going back to 1989, two-year yields on average fell 15 basis points one month after the Fed started slashing rates.

Meantime, the International Monetary Fund said the US election is creating “high uncertainty” for markets and policymakers, given the sharply divergent trade priorities of the candidates. That gap creates the risk of another potential round of volatility on global markets similar to the rattling August selloff.

“Presidents don’t control markets,” said Callie Cox at Ritholtz Wealth Management. “Over time, the stock market’s common thread has been the economy and earnings, not who’s in the Oval Office. Be prepared for mood swings in markets as we get closer to Election Day. But remember that election-fueled storms often dissipate quickly.”

As the earnings season rolls in, US companies are reaping the best stock-market reward in five years for beating profit expectations that were lowered in the run-up to the reporting season.

S&P 500 firms that posted better-than-estimated third-quarter earnings have outperformed the benchmark by a median of 1.74% on the day of reporting results, according to data compiled by Bloomberg Intelligence. That’s the strongest rate in BI’s records going back to 2019.

At the same time, companies missing estimates trailed the S&P 500 by a median of 1.5%, a less severe underperformance than the 1.7% experienced in the second quarter, the data showed.

“This earnings season we are watching what companies are saying about inflation and the economy,” said Megan Horneman at Verdence Capital Advisors. “In addition, their view on interest rates, especially if the Fed cannot be as aggressive as the market is pricing in at this point. It is good to see analysts getting realistic about 2025 earnings growth. However, at 15% earnings growth, we believe it is still too optimistic given the expectation for slower economic growth in 2025.”

Corporate Highlights:

• Verizon Communications Inc. reported revenue that missed analysts’ expectations, weighed down by lackluster sales of hardware such as mobile phones.

• 3M Co. increased the low end of its 2024 profit forecast and reported earnings that topped analyst estimates as a push to boost productivity gained traction.

• General Motors Co. signaled solid US demand for its highest-margin vehicles even as the broader market softens, posting better-than-expected results for the latest quarter and raising the low end of its full-year profit forecast.

• General Electric Co.’s sales fell short of Wall Street’s expectations last quarter, tempering enthusiasm for its improved profit outlook as the jet engine maker grapples with supply-chain limitations that are weighing on deliveries.

• Kimberly-Clark Corp., owner of the Scott toilet paper brand, lowered its full-year organic sales forecast after reporting weaker-than-expected results.

• Philip Morris International Inc. forecast higher-than-expected profit this year, citing soaring demand for its Zyn nicotine pouches in the US.

• Lockheed Martin Corp.’s third-quarter revenue missed expectations, pulled down by weaker aeronautical sales and ongoing issues with its F-35 fighter jet program.

• Zions Bancorp’s third-quarter adjusted net interest income came in ahead of estimates. Morgan Stanley said the results beat across the board and sees the positive trajectory in net interest income continuing into 2025.

• L’Oreal SA posted disappointing sales last quarter as the beauty company suffers from worsening consumer demand in China.

• An investigation of Huawei Technologies Co.’s latest AI offering has unearthed an advanced processor made by Nvidia Corp. manufacturing partner Taiwan Semiconductor Manufacturing Co., suggesting that China is still struggling to reliably make its own advanced chips in sufficient quantities.

Key events this week:

• Canada rate decision, Wednesday

• Eurozone consumer confidence, Wednesday

• US existing home sales, Wednesday

• Boeing, Tesla, Deutsche Bank earnings, Wednesday

• Fed’s Beige Book, Wednesday

• 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 0.2% as of 1:11 p.m. New York time

• The Nasdaq 100 fell 0.1%

• The Dow Jones Industrial Average was little changed

• The MSCI World Index fell 0.4%

• The Russell 2000 Index fell 0.3%

Currencies

• The Bloomberg Dollar Spot Index was little changed

• The euro fell 0.1% to $1.0804

• The British pound was little changed at $1.2975

• The Japanese yen fell 0.2% to 151.09 per dollar

Cryptocurrencies

• Bitcoin fell 0.9% to $67,140.85

• Ether fell 2.2% to $2,614.89

Bonds

• The yield on 10-year Treasuries was little changed at 4.20%

• Germany’s 10-year yield advanced four basis points to 2.32%

• Britain’s 10-year yield advanced three basis points to 4.17%

Commodities

• West Texas Intermediate crude rose 2.5% to $72.35 a barrel

• Spot gold rose 1% to $2,746.52 an ounce

This story was produced with the assistance of Bloomberg Automation.

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