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By Johann M Cherian and Sukriti Gupta
(Reuters) - U.S. stocks dropped on Monday, with the benchmark S&P 500 at a two-month low as bond yields surged after robust payroll numbers last week, boosting expectations that the Federal Reserve will maintain a hawkish stance for most of this year.
At 09:50 a.m. the Dow Jones Industrial Average rose 105.06 points, or 0.25%, to 42,043.51, the S&P 500 lost 40.79 points, or 0.70%, to 5,786.25, and the Nasdaq Composite lost 274.13 points, or 1.43%, to 18,887.50.
Wall Street's fear gauge rose 1.60 points to hit a more than three-week high.
The domestically sensitive Russell 2000 index declined 1% to its lowest since September 2024, extending Friday's decline, which saw it enter correction territory after falling more than 10% from its November intraday record high.
Pressuring stocks, yields on longer-dated Treasury bonds are pinned at multi-month highs. [US/]
At one point, traders were no longer fully pricing in even one Fed rate cut this year, according to data compiled by LSEG, from about 43 basis points before Friday's job figures. Bets currently reflect expectations of a 27 bps easing by the Fed's December meeting.
"In the early stages of recalibrating monetary policy, investors tend to take a bit of a risk-off attitude," said Art Hogan, chief market strategist at B Riley Wealth.
"But the important part of what has changed thus far this year is that economic data being positive at the end of the day will likely be a net positive for corporate earnings and for markets."
Five of the 11 S&P 500 sectors declined, led by a 1.8% drop in Technology stocks. Megacaps were down, with Tesla sliding 2%, Apple dropping 2.7% and Alphabet losing 1.5%.
The main indexes logged their second consecutive week of declines in the previous session after multiple reports pointed to better-than-expected economic activity, raising worries that inflation could be running high.
Investors also priced in the likelihood that the incoming Donald Trump administration's policies - such as tariffs and a clampdown on illegal immigration - could threaten global trade and fuel price pressures when the Fed has also signaled a cloudy monetary policy outlook. Trump is expected to take office on Jan. 20.
The Consumer Price Index numbers and the central bank's Beige Book on economic activity, both due on Wednesday, could help investors gauge the Fed's policy outlook.
Chip stocks such as Nvidia dropped 3.3% and Advanced Micro Devices fell 1% after the U.S. government said it would further restrict artificial-intelligence chip and technology exports.