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Stocks climbed modestly on Thursday as Wall Street attempted to recover some of September’s steep losses amid rising Treasury yields and heightened recession fears.

The Dow Jones Industrial Average rose 116 points, up 0.35% to 33,666 while the S&P 500 added 0.59% to reach 4,300. Gains were driven by strength in communication services and technology shares. The Nasdaq Composite gained 0.83% to 13,201 even as benchmark 10-year Treasury yields topped 15-year highs.

Despite Thursday’s muted rally, major indexes remain on pace to conclude their worst month and quarter of 2022 as stubborn inflation keeps pressure on the Federal Reserve to maintain an aggressive policy stance. September is shaping up as the worst month for stocks since March 2020 at the outset of the pandemic.

Surging bond yields have spooked equity markets in recent weeks, fueling worries that the Fed’s rate hikes could tip the economy into recession. However, some analysts suggest stocks may be nearing oversold territory and due for a tradable bounce.

Yield Surge Weighs on Stocks as Fed Remains Hawkish

Behind stocks’ September selloff has been a relentless climb in Treasury yields, topping out at 15-year highs this week. The benchmark 10-year Treasury yield reached 4.019% on Tuesday before easing later in the week. Still, it remains inverted from the 2-year yield, a phenomenon that often preludes economic contraction.

The yield surge reflects mounting conviction that the Federal Reserve’s inflation fight is far from over. After another hotter-than-expected CPI print in September, markets are pricing in a 77% probability of a fourth straight 75 basis point rate hike at the November FOMC meeting.

Higher rates diminish the relative appeal of equities, especially pricey growth stocks. Sustained yield pressure has dragged major indexes near 2022 lows, with the S&P 500 recently dipping below its mid-June bear market trough. The tech-concentrated Nasdaq entered a new bear market this week, now down over 31% from its November 2021 peak.

“It’s hard for us to have any real conviction in these signals without the fever in rates, the dollar, and oil breaking,” said Wolfe Research technical analyst Rob Ginsberg. “Today they each closed a touch off their highs.”

Indeed, any reprieve from climbing yields may be required for stocks to mount a durable rebound from oversold conditions. But with recent economic data like retail sales and jobless claims coming in hotter than anticipated, the Fed remains unlikely to pivot from its aggressive posture anytime soon.

September Slump Poised to Snap Streak of Quarterly Gains

Barring an unforeseen rally in Friday’s session, stocks are positioned to conclude one of their worst monthly and quarterly performances of 2022. The Dow has dropped nearly 3% in September, on pace for its poorest month since June. The S&P 500 is down 4.6% month-to-date, closing in on its steepest monthly slide since the pandemic selloff.

Meanwhile, the Nasdaq’s 5.9% September skid would rank as its worst month since January. The tech-heavy index is down over 31% from its November high, nearing the 32% decline that typically defines a bear market.

All three major indexes are also on track to snap long streaks of positive quarterly returns. The Dow and S&P 500 are both down over 2% for the third quarter, on pace to halt 6-quarter win streaks. The Nasdaq has fallen 4.3% this quarter to halt its own 8-quarter run of quarterly advances.

While none of the losses match the sheer market carnage seen in early 2020 at the pandemic’s onset, the S&P 500’s 19% peak-to-trough plunge has met the typical definition of a bear market. Further Fed-fueled yield pressure could spur additional equity declines heading into year-end.

Consumer Discretionary Leads Sector Declines as Rates Surge

Among S&P 500 sectors, Consumer Discretionary has unsurprisingly borne the brunt of recent selling pressure, down nearly 30% year-to-date. The high-yielding sector typically suffers disproportionately from rising rates given its rich valuations.

The Energy sector has been the clear outlier, gaining over 30% this year on the back of surging oil prices even amid broader market turmoil. But in a sign of gathering weakness, even Big Oil has seen its share prices steadily erode after peaking in early June.

Other rate-sensitive market segments like Technology and Communication Services have struggled in 2022, both sharply underperforming the broader S&P 500. mega-cap Technology stalwarts like Apple and Microsoft have been relative safe-havens, but both remain solidly negative on the year as yields climb.

Among Dow components, Walgreens Boots Alliance has been the worst-performing stock year-to-date as of Thursday, down nearly 27%. Athletic apparel giant Nike has plunged 19% amid softening consumer demand, delivery delays, and excess inventory. Verizon, American Express, and Disney round out the Dow’s bottom five performers of 2022 so far.

Thursday Rally Attempt Led by Tech, Communications

Stocks across the board caught a breather on Thursday after a bruising September selloff. The S&P 500 rallied back above a key support level at 4,300 even as Treasury yields topped 15-year highs.

Gains were relatively broad-based, with all 11 S&P 500 sectors rising on the day. Outperformance from the Technology and Communications sectors lifted the tech-heavy Nasdaq Composite nearly 1% higher. Terraform Labs climbed 7% to lead the Nasdaq 100 while chipmaker Nvidia added 4%.

Stocks with heavy institutional ownership were generally stronger, contrasting with recent underperformance from hedge fund favorites. Meanwhile, retail trader favorites like GameStop and AMC Entertainment traded flat to lower on the session.

In the Dow, shares of Apple, Microsoft, and Intel led the 30-stock index 0.5% higher. Global consultancy Accenture was the notable Dow laggard, plunging nearly 5% after issuing disappointing forward guidance. Accenture cited a strong dollar and slower consulting bookings for its muted outlook.

Treasury Yields Ease From Highs But Remain Inverted

Despite stocks’ modest Thursday rally, an easing of Treasury yield pressure may ultimately be required for durable upside. Benchmark 10-year yields remained inverted from 2-year rates, flashing a reliable indicator of impending recession.

Yields initially climbed Thursday after a better-than-expected reading on second quarter GDP showed the economy shrinking less than anticipated. Investors are also eying Friday’s PCE inflation data, the Fed’s preferred inflation gauge. An upside surprise could place added pressure on monetary policymakers.

However, bonds rallied from session highs, with the 10-year yield backing off multiyear peaks. The brief yield reprieve allowed stocks to add to opening gains throughout the trading day. Still, 2s10s inversion remains deeply entrenched, underscoring recession risk.

Fed speakers like Chicago Fed President Austan Goolsbee continue to push back against notions of a policy pivot. In remarks Thursday, Goolsbee warned against relying too much on historical inflation-growth dynamics when assessing current policy.

Final Quarter Selloff Further Clouds Economic Outlook

With September poised to conclude as the worst month for stocks since the early pandemic plunge, investors are bracing for additional volatility in the year’s final quarter. Lingering inflation has dashed early optimism about a swift Fed pivot, placing added strain on an already slowing economy.

GDP unexpectedly contracted through the first half of 2022, meeting a common definition of technical recession. And while the labor market remains resilient for now, the lagging effects of aggressive monetary tightening have yet to fully materialize.

Given the gloomy macro backdrop, analysts suggest approaching any October rally cautiously. Seasonality trends may spur a bounce after September’s rout, but the major headwinds of inflation and tighter financial conditions remain largely unabated.

As the Fed commits to restore price stability no matter the economic cost, further equity declines into year-end cannot be ruled out. The path to any sustainable upside for stocks likely remains through lower inflation readings and a definitive peak in interest rates. Until evidence of either comes through, volatility and downside risks prevail.

Stay tuned to Financial News for continuing coverage of market trends, economic data, earnings season, and more as the pivotal fourth quarter unfolds.