U.S. stocks fell sharply on Tuesday, with tech names dragging down the broader markets as Treasury yields traded near three-month highs and lawmakers in Washington continued their budget stalemate.
The Nasdaq Composite dropped 2.83% to 14,546.68 for its worst day since March and the S&P 500 shed 2.04% to finish at 4,352.63. The Dow Jones Industrial Average lost 569.38 points, or 1.63%, to close at 34,299.99.
The 10-year Treasury yield continued its speedy climb on Tuesday, rising as high as 1.567% as investors bet the Fed would carry through on its promise to curb its emergency bond-buying stimulus as inflation jumps. The 10-year yield, which traded as low as 1.13% as recently as August, has reversed dramatically to the highest levels since June after the Fed signaled last week it would taper its $120 billion in monthly bond purchases "soon."
"The market's been steadily coming around to the reality that yields were awfully low relative to the fundamentals. Now the Fed is shifting, and everybody's shifting their positions, all at once, as we tend to do," said Kathy Jones, chief fixed income strategist at the Schwab Center for Financial Research.
Tech shares fell as a rapid rise in rates makes their future cash flows less valuable, and in turn makes the popular stocks appear overvalued. Higher rates also hinder tech companies' ability to fund their growth and buy back stock.
Facebook, Microsoft and Alphabet lost more than 3%, while Amazon dropped more than 2%. Large chip stocks struggled, with Nvidia sliding 4.5%.
Also weighing on sentiment was a budget showdown in Washington. Senate Republicans blocked a House-passed bill Monday that would have funded the government into December and suspended the debt ceiling until December of 2022.
Congress must approve government funding by Friday to avoid a shutdown, and Treasury Secretary Janet Yellen warned Congress in a letter on Tuesday that lawmakers need to raise the debt limit by Oct. 18 to avoid a government default. President Biden's massive infrastructure plan also faces an uncertain future.
"The Washington goings-on certainly don't help, as we have a lot of uncertainty around tax policy and of course the debt ceiling," said Jeff Buchbinder, equity strategist at LPL Financial.
While tech stocks dragged down the broader market, sectors tied to the economic reopening outperformed and energy names saw a slight gain. Shares of Ford rose 1% after the company announced plans to build new production facilities in the U.S.
"I'm having actually a little deja vu to last fall, if you remember last September, when we saw interest rates move a little bit and the reaction in tech," said Jeff Kilburg, the chief investment officer at Sanctuary Wealth. "And the selling pressure in tech really was a catalyst last fall for the reflation and rotation trade, and again here we are."
However, stocks closed near their lows of the day as the weakness in Big Tech appeared to overpower some of the reflation trade.
"If the heavyweights of many of the largest US indices and ETFs continue to trade heavy as UST yields rally and investors rotate out of long duration growth, this could weigh on all stocks," Chris Murphy from Susquehanna said in a note to clients.
Concern about supply chain issues and rising consumer prices may also have contributed to the turmoil in markets. Federal Reserve Chair Jerome Powell told the Senate Banking Committee on Tuesday that inflation could persist longer-than-expected due to supply chain issues and reopening pressures.
"These effects have been larger and longer lasting than anticipated, but they will abate, and as they do, inflation is expected to drop back toward our longer-run 2 percent goal," Powell said.
The weakness on Tuesday extended the losses for the major indexes in September. The Nasdaq is down 4.7% month to date, while the S&P 500 and Dow are down 3.8% and 3%, respectively.
— with reporting from CNBC's Patti Domm.