US Treasury Yields Continue to Hit New Highs, Philadelphia Semiconductor Index Drops Over 2% as US Stocks Face Triple Pressure in September

TradingKey - After Federal Reserve Chair Kevin Warsh delivered hawkish signals at the Jackson Hole annual symposium last week, markets renewed bets on further rate hikes this year.

Driven by rising market expectations for rate hikes, U.S. 10-year Treasury yields reached their highest levels since January 2025 for two consecutive days on Monday and Tuesday. JPMorgan's trading team stated that ahead of the Federal Reserve's rate decision on September 16, it is adjusting its stance on U.S. equities from bullish to "tactically cautious/neutral."

JPMorgan noted that U.S. stock bull markets typically end with a rate-hike cycle or a recession. However, the probability of a U.S. recession over the next few quarters is very low. Therefore, JPMorgan's current cautious assessment is closer to a "rising risk of high-level volatility" rather than the "imminent onset of a bear market."

Fed Hawkish Signals Become Biggest Short-Term Variable for US Stocks

Andrew Tyler, head of U.S. Market Intelligence at JPMorgan, believes that if the Fed does restart rate hikes, it is currently difficult for investors to gauge the scale and duration of this hiking cycle. Compared with previous Fed chairs, Warsh provides the market with less explicit forward guidance on interest rates, making it difficult for the market to establish a clear policy path.

Warsh previously emphasized that the Fed's 2% inflation target is unwavering; if underlying inflation fails to come down clearly and fast enough, policymakers "have work to do." He also believes that the U.S. labor market is close to full employment, current overall financial conditions are not restrictive, and short-term interest rates remain the Fed's primary tool for fulfilling its dual mandate.

The market implication of these statements is that with the economy yet to stall noticeably and employment remaining resilient, persistent inflation may leave room for the Fed to tighten policy further. Uncertainty surrounding the rate path thus directly weighs on U.S. stock valuations and risk appetite.

US Treasury Yields Rise, Pressuring Growth Stock Valuations

Amid rising oil prices and mounting rate hike expectations, the 10-year US Treasury yield broke above 4.79%, reaching this level for the first time since January 2025. Meanwhile, the interest rate swap market indicates that investors see a nearly 70% probability of the Federal Reserve raising rates by 25 basis points next month.

Rising US Treasury yields impact US stocks through two channels: first, by increasing financing costs for businesses and consumers; second, by pushing up the risk-free rate, which depresses the valuations of growth stocks with a high proportion of future cash flows. AI, software, and high-valuation tech stocks are therefore more vulnerable to the repricing of interest rates.

As of press time, the Dow Jones Industrial Average fell 0.42%; the Nasdaq Composite Index dropped 0.73%; the S&P 500 Index slid 0.45%; and the Philadelphia Semiconductor Index declined 2%.

Among individual stocks, Tesla (TSLA) fell 2.41%, Amazon (AMZN) dropped 2.01%, Microsoft (MSFT) slipped 1.17%, Nvidia (NVDA) lost 1.04%, and Google (GOOGL) declined 1.02%.

US Stocks Face Triple Pressure in September

First, the Sept. 16 Federal Reserve meeting was described by Taylor as a "meeting with substantial variables." The market may have previously built positions around rate cuts or holding rates steady, but Warsh's hawkish statements altered policy expectations. If the Fed pivots to raising rates, the market will also need to judge whether the hike is a one-off adjustment or the starting point of a new cycle.

Second, September is typically a relatively weak month for U.S. stock returns. Seasonality itself does not determine index movements, but when it coincides with interest rate uncertainty and positioning adjustments, it may amplify short-term volatility.

Finally, momentum in AI stocks may recede. Taylor also mentioned that high-flying artificial intelligence stocks could experience a momentum trading reversal. In recent times, AI capital expenditures and corporate earnings expectations have been key supports for U.S. equities; however, if interest rates rise, credit spreads widen, or the market begins to question the pace of return on AI investments, related sectors could see profit-taking ahead of the broader market.

Nonfarm Payrolls and CPI: Key Test Ahead of September Fed Meeting

JPMorgan believes that Friday's monthly jobs report will be crucial, but the Consumer Price Index (CPI) due on September 11 may be even more important.

The reason is that Warsh has explicitly stated that the U.S. labor market is close to full employment, and a slowdown in job growth will not necessarily significantly alter the Federal Reserve's assessment of its employment mandate; by contrast, inflation data is more likely to directly influence policy choices.

Economists expect U.S. employers added 55,000 jobs in the August nonfarm payrolls report, following an unexpected decline in July payrolls. If the employment data broadly aligns with expectations, market focus could quickly shift to CPI and energy prices. For the stock market, strong data could push yields higher and weigh on valuations; data significantly weaker than expected, however, could trigger concerns over economic growth and stagflation.

If employment is stronger than expected, economic resilience will be reinforced, but pressure for rate hikes and higher yields may build; if employment is weaker than expected, rate-cut expectations could resurface, though a severe drop might also trigger recession fears.

If CPI remains high, it will reinforce the Fed's hawkish stance and increase volatility in high-valuation tech stocks; if CPI cools noticeably, it will relieve rate-hike pressure, but whether the market has already priced it in remains to be seen.