Nasdaq falls 1% Wednesday to close in correction territory, off 10% from its November record

The Nasdaq Composite fell again on Wednesday, bringing its decline from its November high to more than 10% as investors continue to dump tech shares as interest rates spike to start the new year.

The technology-focused Nasdaq Composite dipped 1.15% to 14,340.26. Wednesday’s losses brought the index 10.7% off its most recent record close in November 2021.

The Dow Jones Industrial Average fell 339.82 points to 35,028.65, dragged down by a 3.1% decline in Caterpillar‘s stock. The S&P 500 slid nearly 1% to 4,532.76.

The small-cap benchmark Russell 2000 lost 1.6% on Wednesday, closing at a 52-week low.

Stocks fluctuated between losses and gains but ultimately closed at session lows on Wednesday.

Elevated bond yields are plaguing the market this year, as investors prepare for the possibility of more aggressive tightening by the Federal Reserve. The U.S. 10-year Treasury yield topped 1.9% earlier on Wednesday, its highest level since December 2019. The 10-year rate started the year around 1.5%.

Nasdaq’s pullback from its November high has been lead by growth stocks whose valuations ballooned during the pandemic. Shares of Peloton are off more than 80% from their highs. Zoom Video has shed more than 70%. Moderna, DocuSign and Paypal are all down more than 40% from their highs.

The rate spike has hit the tech-heavy Nasdaq disproportionately as tech stocks’ future earnings look less attractive when rates are on the rise. Tech companies also rely on low rates to borrow for investing in innovation. The S&P 500 is just about 5% below its record close.

“Investors worry that higher rates and tighter financial conditions will lead to valuation compression, in effect undoing much of the Fed’s decade-long largesse,” Jack Ablin, Cresset Capital founding partner and CIO, told clients.

Equities declined despite a slew of strong corporate earnings results. Bank of America beat Wall Street estimates as it released pandemic-related loan loss reserves. Shares rebounded 0.4%, a day after sliding 3.4%. Other bank stocks, however, were in the red.

Morgan Stanley saw its stock rise 1.8% after the bank’s fourth-quarter profit topped estimates. It also experienced a 13% jump in equities trading revenue.

Procter & Gamble shares popped nearly 3.4% after the consumer giant reported fiscal second-quarter earnings and revenue that topped Wall Street’s expectations. The company raised its outlook for sales growth.

“Higher inflation has raised concerns about input costs for many companies. Since [Procter & Gamble’s] margins were fine, this has relieved some of those concerns,” said Matt Maley, chief market strategist at Miller Tabak + Co.

UnitedHealth also rose slightly after beating on the top and bottom lines of its quarterly results.

On the negative side, home builders also were broadly lower following after KeyBanc downgraded the group on concerns over looming interest rate hikes that will drive up borrowing costs. KB Home lost 3.9%, Lennar fell about 4.4% and D.R. Horton fell 3.3%.

Shares of Sony tumbled 5% the day after Microsoft said it is buying video game publisher Activision Blizzard for nearly $69 billion. Sony’s PlayStation competes with Microsoft’s Xbox consoles. The drop in Sony’s stock comes after shares slid nearly 7.2% on Tuesday.

Earnings season is picking up on Wall Street and so far the majority of companies have surpassed analysts’ expectations. Of the 44 S&P 500 companies that have reported quarterly results, nearly 73% have topped Wall Street’s expectations, according to FactSet.

Surging bond yields spurred the sell-off in stocks on Tuesday. The 2-year Treasury rate — which reflects short-term interest rate expectations — topped 1% for the first time in two years.

On Tuesday, the Dow Jones Industrial Average lost more than 540 points, dragged down by a 7% drop in Goldman Sachs. The Wall Street bank missed analysts’ expectations for earnings as operating expenses surged 23%.

The S&P 500 declined 1.8% on Tuesday. The Nasdaq Composite, full of interest rate sensitive technology stocks, was the relative underperformer, dipping 2.6%.