US Stocks Rally as Treasury Yields Drop and Inflation Concerns Ease

US stock markets reversed early losses and ended higher on Thursday, recovering from a dip that had pushed the S&P 500 to its lowest point in two weeks. The rebound was triggered by a retreat in Treasury yields following a recent surge that had driven the 10-year yield to a 24-year high.

Markets initially fell as recent economic data continued to highlight a robust US economy with persistent inflationary pressures. This raised concerns among investors that the Federal Reserve might adopt a more aggressive stance on interest rate increases to combat inflation.

The Labor Department reported that weekly initial jobless claims declined to 197,000, which was below economists’ expectations of 200,000 according to a Reuters poll. This data added to a series of indicators this week pointing to a solid labor market, setting the stage for the government’s payroll report due on Friday.

Meanwhile, the 10-year Treasury note had climbed to its highest level in over two decades, capping a quarter that marked its biggest gain since 1994. This rise in yields pressured stock prices lower, especially after the Institute for Supply Management’s manufacturing index showed a slight drop to 54.5 in September from 54.6 in August, along with a notable rise in input costs, which escalated fears of inflation.

However, Treasury yields began to retreat as buyers entered the market. The decline accelerated after Federal Reserve Vice Chair Philip Jefferson indicated that the central bank might hold off on further rate hikes for the time being, following the 25 basis point increase in September. The two-year Treasury yield, which closely tracks expectations for Fed rate moves, fell nearly 10 basis points, marking its largest daily decrease since August 2025.

Scott Welch, chief investment officer at Certuity in Potomac, Maryland, commented on the market environment, saying, "Even though valuations have come down, the market's still not cheap, so I'm not bearish on the equity market. We can chug along, but I expect higher volatility in both equities and bonds." He added that the current market conditions represent a "new normal," different from recent years and requiring investors to adjust their strategies.

By the close of trading, the S&P 500 had risen 17.28 points, or 0.23 percent, finishing at 7,668.82. The Nasdaq Composite gained 17.73 points, or 0.07 percent, ending at 26,871.60, while the Dow Jones Industrial Average increased 29.84 points, or 0.06 percent, closing at 50,935.89.

The energy sector led the gains, with the S&P 500 energy index climbing nearly 2 percent. Oil prices surged as Brent crude rose by more than $4 a barrel after China announced a suspension of fuel exports, a move that could further tighten global energy supplies and stoke inflationary pressures.

Technology stocks also showed resilience, advancing close to 1 percent. Software companies benefited from strong earnings reports, notably Accenture, whose shares hit their highest intraday level since mid-February after forecasting full-year revenue growth above expectations. Micron Technology also closed higher, buoyed by a better-than-expected revenue forecast and $32 billion in customer commitments tied to supply agreements, reinforcing confidence in the artificial intelligence sector.

Inflation data released on Wednesday was softer than anticipated, reducing market expectations for a rate hike at the Federal Reserve’s upcoming October meeting. According to the CME FedWatch tool, the probability of a 25 basis point increase has dropped to 28.2 percent from 68.6 percent a week earlier.

Following Jefferson’s remarks, Minneapolis Federal Reserve President Neel Kashkari expressed that additional rate hikes might still be necessary in 2027 to cool economic growth, though he remained uncertain about the timing of the next increase, whether it would occur this month or later.

These developments highlight the delicate balance the Federal Reserve faces in managing inflation without stifling economic expansion. Investors continue to weigh the implications of economic data, central bank signals, and global factors such as energy supply disruptions in shaping the outlook for markets going forward.