Rising Bond Yields Put Pressure on Equities; Fed Rate Decision Looms

Market Overview: Yield Surge Weighs on Stock Sentiment

A sharp climb in bond yields dominated market sentiment on Monday, creating headwinds for equity indices across the board. The 10-year Treasury note yield surged to 4.19%, marking a 2.25-month peak, before settling at 4.17% (up +4 basis points). This uptick in bond yields pressured major stock benchmarks, with the S&P 500 retreating 0.35%, the Dow Jones Industrials sliding 0.45%, and the Nasdaq 100 declining 0.25%. December futures contracts mirrored the weakness, with E-mini S&P 500 futures down 0.35% and E-mini Nasdaq futures falling 0.27%.

The bond market dynamics created a challenging backdrop for equities, yet investors found reasons for optimism. Market participants increasingly anticipate a 99% probability that the Federal Reserve will implement a -25 basis point rate cut following the conclusion of its two-day FOMC meeting on Wednesday. Additionally, December’s seasonal tailwinds—traditionally one of the year’s most bullish months—provided underlying support for stock valuations.

Earnings Momentum and M&A Activity Provide Upside Catalysts

Despite the bond yield headwinds, corporate activity continued to drive select equity rallies. The earnings season is in its final stretch, with 495 of 500 S&P 500 companies having reported results. According to Bloomberg Intelligence, an impressive 83% of reporting firms beat consensus expectations, positioning this quarter on track for its strongest performance since 2021. Aggregate Q3 earnings expanded by +14.6%—more than double the +7.2% y/y forecast.

Notable M&A transactions and index reconstitutions lifted specific names. Confluent surged more than +29% following International Business Machines’ announcement that it will acquire the company for approximately $11 billion, including debt, at roughly $31 per share. Carvana rallied more than +12% after S&P Dow Jones Indices disclosed that the company will join the S&P 500, replacing LKQ Corp, effective December 22.

Semiconductor Strength Offsets Broader Headwinds

Chip manufacturers emerged as the session’s strongest sector performer, providing critical support for the technology-heavy Nasdaq 100. Micron Technology led semiconductor gainers with a +4% advance, while ON Semiconductor climbed +3%. Additional chip peers posted solid gains: Microchip Technology, Broadcom, GlobalFoundries, and Lam Research each gained more than +2%. ASML Holding, Nvidia, and Advanced Micro Devices also closed higher by more than +1%.

This sector resilience was particularly important given the broader equity selloff, as technology and semiconductor companies carry significant weight in major indices.

Notable Decliners: Downgrades and Strategic Announcements

Selective weakness materialized across several names, with downgrades and strategic announcements triggering sharp selloffs. Air Products and Chemicals plunged more than -9% after announcing a long-term partnership with Yara International on ammonia projects across the US and Saudi Arabia. Marvell Technology tumbled more than -6% following a downgrade to hold by Benchmark Company LLC. Morgan Stanley downgraded Tesla to equal weight from overweight, prompting a -3% decline, while also downgrading Rivian Automotive to underweight with a $12 price target, resulting in a -2% pullback.

Range Resources fell more than -4% after JPMorgan Chase downgraded the stock to underweight with a $39 price target. Boston Scientific declined more than -3% on a downgrade to hold from buy by Nephron Research. Lennar and CoreWeave both retreated more than -2%, the latter announcing plans for a $2 billion convertible senior notes offering.

Standout Gainers Reflect Clinical Success and Index Effects

On the flip side, Kymers Therapeutics soared more than +41% after unveiling positive Phase 1b trial results for KT-621, an oral STAT6 degrader, in patients with moderate to severe atopic dermatitis. Paramount Skydance surged more than +9% after launching a hostile takeover bid for Warner Bros Discovery at $30 per share. Warner Bros Discovery itself rallied more than +4% in the Nasdaq 100 on this offer, which exceeded Netflix’s prior bid of $27.75. CRH Plc advanced more than +5% after its inclusion in the S&P 500 was announced, replacing Solstice Advanced Materials.

Global Markets and International Data

Overseas markets posted modest gains on Monday. China’s Shanghai Composite rallied to a two-week high, closing up +0.54%, buoyed by mixed trade data showing November exports rose +5.9% y/y (ahead of +4.0% expectations) despite imports climbing only +1.9% y/y (below +3.0% forecasts). Japan’s Nikkei Stock 225 gained +0.18%, while Europe’s Euro Stoxx 50 edged up +0.03%.

European economic data pointed to underlying strength. Germany’s October industrial production exceeded expectations with a +1.8% m/m gain—the largest in seven months. The December Sentix investor confidence index rose to -6.2, slightly outperforming forecasts of -6.3.

Treasury Market Dynamics and Rate Market Expectations

The Treasury market experienced significant repricing as bond yields climbed. March 10-year T-note futures slid to a 2.25-month low, with the yield rising to its aforementioned 2.25-month peak. Supply pressures intensified as the Treasury announced a $119 billion auction schedule of T-notes and T-bonds for the week. However, demand remained firm—a $58 billion auction of 3-year T-notes posted a bid-to-cover ratio of 2.64, surpassing the 10-auction average of 2.63.

Negative carryover from falling Japanese 10-year government bond prices, which hit 18-year lows amid BOJ rate-hike speculation, weighed on US Treasuries. European government bond yields similarly climbed, with Germany’s 10-year Bund yield reaching an 8.5-month high of 2.876% (finishing up +6.3 bp) and the UK’s 10-year gilt yield rising to a 1.5-week high of 4.546% (up +5.2 bp).

ECB Executive Board member Isabel Schnabel reinforced that risks to Eurozone growth and inflation tilt to the upside, signaling the central bank’s next move is more likely to be a rate increase. Swaps price in only a 1% probability of a -25 bp ECB rate cut at its December 18 policy meeting.

Week Ahead: Key Economic Data and Fed Communications

Market participants face a data-rich week highlighted by the Fed’s policy decision. Tuesday will bring October JOLTS job openings data (expected to increase by 7,150), while Wednesday features the Q3 employment cost index (consensus +0.9%) and the FOMC rate decision. Fed Chair Powell’s post-meeting commentary on Wednesday will be scrutinized for guidance on future rate trajectory. Thursday brings weekly initial jobless claims data (expected +29,000 to 220,000).

Political Developments and Fed Leadership Transition

President Trump indicated last Tuesday that he will announce his selection for the next Federal Reserve Chair in early 2026. Bloomberg reported that National Economic Council Director Kevin Hassett is viewed as the likely successor to current Chair Powell. This development raises questions regarding Fed independence, given Hassett’s alignment with the administration’s preference for aggressive interest rate reductions.

The combination of rising bond yields, strong earnings fundamentals, strategic M&A activity, and semiconductor sector strength created a mixed session that ultimately tilted toward caution as investors await the Fed’s critical policy decision.