Stocks Slip as Yields Rise. Why Math Is Scaring Markets.

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Stocks were falling Monday as bond yields continued to rise ahead of the start of earnings season.

Dow Jones Industrial Average
futures have declined 104 points, or 0.3%, while

S&P 500
futures had fallen 0.6%, and

Nasdaq Composite
futures have dropped 1.1%.

The losses weren’t limited to the U.S. The pan-European

Stoxx 600
fell 0.5%, though Paris’

CAC 40
rose 0.3% after first-round election results showed President Emmanuel Macron with a greater lead than polls had suggested over far-right challenger Marine Le Pen. Stocks in Asia were broadly lower, with Hong Kong’s

Hang Seng Index
tumbling 3% amid fears of the Covid-19 outlook in China.

“In Asia, a darkening Covid-19 outlook in China has prompted growth and consumption fears, sending Chinese equities and oil prices sharply lower today,” said Jeffrey Halley, an analyst at broker Oanda.

While we often search for reasons for why the stock market is dropping, sometimes it’s simple math. The yield on the benchmark 10-year U.S. Treasury yield has risen 0.038 percentage point to 2.753% on Monday, and higher bond yields put pressure on valuations by reducing the “equity risk premium,” or the amount of extra return an investor should expect to get from stocks.

The math works like this. The S&P 500 had a price/earnings ratio of 19.35 at Friday’s close. Flip the P/E to get the E/P, or earnings yield, in this case, 5.17%, subtract the 2.75% 10-year yield, and you get an equity risk premium of 2.4%. Now, compare that to the start of the year, when the 10-year traded at 1.5%, and stocks traded at 21.5 times earnings, or an earnings yield of 4.65%. That meant stocks, even at a higher valuation, offered 3.15% more than a Treasury, meaning that investors earned a higher risk premium, despite the S&P 500’s higher P/E at the time.

All of this, of course, is due to the Federal Reserve, which is expected to aggressively raise interest rates this year and next as it battles historically high inflation. It may also be planning to begin “quantitative tightening,” or reducing its balance sheet, as early as its May meeting. Last week, comments from a number of officials at the central bank and the minutes from the last Fed meeting suggested the Fed will move aggressively to tighten policy, with a sizable half-point interest rate hike expected soon.

“Last week’s unexpectedly aggressive pivot by several Fed officials, who are normally considered to be of a more dovish persuasion, [has seen] U.S. 10-year, 5-year, and 2-year yields hit their highest levels in over three years,” said Michael Hewson, an analyst at broker CMC Markets.

In the spotlight this week will be a key U.S. inflation reading. The release Tuesday of the consumer-price index for March will be the last CPI data the Fed receives before its next meeting on monetary policy.

Also in focus is the start of the first-quarter earnings season. While just 15 companies in the S&P 500 will report results, they include major U.S. financial groups

JPMorgan Chase

(ticker: JPM) and

BlackRock

(BLK) on Wednesday, before

Citigroup

(C),

Morgan Stanley

(MS),

Goldman Sachs

(GS), and

Wells Fargo

(WFG) on Thursday.

In the commodity space, oil prices dropped 2.5%, with futures for U.S. benchmark West Texas Intermediate crude down to $96 a barrel. The Russia-Ukraine war, which has roiled commodity markets for almost two months and pushed WTI up as high as near $130, continues to constrain global crude markets.

Cryptocurrencies were lower, in line with stocks.

Bitcoin
prices lost more than 1% over the past 24 hours and were holding above $42,000; the leading digital asset was trading above $45,000 less than a week ago. Smaller peer

ether
lost almost 3% to around $3,150.

Here are three stocks on the move Monday:

Twitter

(TWTR) has fallen 3% in premarket trading after CEO Parag Agrawal said Sunday that Elon Musk—the CEO of Tesla (TSLA) who recently took a 9.2% stake in the social media group—wouldn’t be joining the Twitter board, after all.

Ericsson

(ERIC) has declined 1.2% in premarket trading after the Swedish telecom group said that it had suspended its business in Russia and recorded a 900 million Swedish krona ($95 million) impairment in the first quarter as a result.

Société Générale

(GLE.France) rose more than 6% in Paris trading after the French banking giant said it would divest from Russia with the sale of its Rosbank stake to Russian oligarch Vladimir Potanin.

Write to Jack Denton at jack.denton@dowjones.com