By Lisa Pauline Mattackal and Pranav Kashyap

(Reuters) – U.S. stock indexes fell on Monday, pressured by rising Treasury yields as markets recalibrated expectations for the Federal Reserve rate cuts, while rising conflict in the Middle East kept traders on the sidelines.

U.S. Treasury yields rallied as investors reassessed the Fed’s rate path, with the yield on benchmark 10-year notes exceeding 4% for the first time in two months, and the two-year yield also briefly rising to 4%.

Investors are pricing in an over 83% chance of a 25 basis point rate cut at the Fed meeting in November, according to the CME’s FedWatch tool, dialing back bets on a 50 bps cut after Friday’s stronger-than-expected non-farm payrolls data.

“The interest rate outlook appears murky, and it will depend upon the strength of the economy or (the) lack thereof over the next year,” said Tony Miano, investment strategy analyst at the Wells Fargo Investment Institute.

The yield spike cast a shadow over rate-sensitive megacap growth stocks, dragging down Tesla 2.3% and Alphabet 0.7%. Amazon.com fell nearly 2.5% after a Wells Fargo downgrade.

The Dow Jones Industrial Average fell 206.27 points, or 0.49%, to 42,146.48, the S&P 500 lost 18.18 points, or 0.32%, to 5,732.89 and the Nasdaq Composite lost 62.58 points, or 0.35%, to 18,075.26.

Escalating geopolitical tensions in the Middle East are also hurting investor appetite.

The CBOE Volatility index, Wall Street’s fear gauge, rose as high as 21.45, and was last at a nearly four-week high of 20.77.

Earlier on Monday, Hezbollah fired rockets at Israel’s Haifa, while Israeli forces looked poised to expand ground raids into south Lebanon.

Most S&P 500 sectors were lower, with energy stocks a notable outlier, up 0.7%. Crude prices extended gains on concerns about supply disruptions from the Middle East conflict, boosting shares of oil companies. [O/R]

Shares of Pfizer rose 3.1% on Monday after a report that activist investor Starboard Value has taken a roughly $1 billion stake in the drug giant.

Meanwhile, Air Products and Chemicals was one of the top S&P 500 gainers, up 7.8% on a report that activist hedge fund Mantle Ridge has built a position in the company.

This week, investors are keenly awaiting the consumer price index data, due on Thursday, and comments from several Fed officials, including Michelle Bowman, Neel Kashkari and Raphael Bostic who are slated to speak later on Monday.

Third-quarter earnings for S&P 500 companies also begin this week, with several major banks scheduled to report on Oct. 11.

Earnings will be a significant test for Wall Street’s rally this year – the S&P 500 is up about 20% year-to-date and stands near record highs. 

Goldman Sachs raised its 2024 year-end S&P 500 target to 6,000 from 5,600, and also lowered its odds of a U.S. economic recession to 15% from 20%. 

Declining issues outnumbered advancers by a 2.46-to-1 ratio on the NYSE, and by a 2.3-to-1 ratio on the Nasdaq.

The S&P 500 posted 34 new 52-week highs and one new low, while the Nasdaq Composite recorded 68 new highs and 81 new lows.

(Reporting by Lisa Mattackal and Pranav Kashyap in Bengaluru; Editing by Shinjini Ganguli)

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