U.S. stocks fell and bond yields rose Tuesday as investors recoiled from another hot inflation report and earnings out of some big banks.
Trading turned volatile in the latter half of the session around the same time Treasury yields kicked higher. The S&P 500 and Nasdaq Composite both surrendered early gains, falling into the red alongside a Dow Jones Industrial Average that had already been hampered by falling Boeing shares and a muted reception to the first batch of quarterly profit reports.
Analysts pointed to new data showing inflation rising at its fastest pace in more than a decade as the key factor behind the pullback in stock and bond prices. Bond yields fall when prices rise. Ahead of the opening bell, the Labor Department said June’s consumer-price index rose 5.4% from a year ago, the highest 12-month rate since August 2008.
The increase surprised investors and analysts, who had forecast a somewhat slower pace of consumer-price growth. Still, stocks ended up rising most of Tuesday morning, led by shares of tech companies, as some investors argued the strong uptick in consumer prices was a product of big leaps in prices of used cars and airfares and would prove to be temporary, echoing the sentiment of the Federal Reserve.
Others said the inflation data highlighted broader price increases across a variety of goods and services, including rent, suggesting the economy could be on the verge of overheating unless the Fed lifts interest rates sooner. Jefferies analysts noted June’s data showed the third straight month of outsize increases in core CPI, comparing the environment with the inflation-filled 1980s.
“The bottom line is that today’s report showed continued breadth, strength and persistency of inflationary pressures,” the Jefferies analysts said. “Given the acute inventory shortages and no sign of weakening demand, it is hard to imagine that these pressures will abate in the near term.”
Those inflation fears ended up overtaking Tuesday’s trading session in the early afternoon following disappointing demand for an auction of 30-year bonds. Analysts linked the weak appetite to investors’ response to the rise in inflation, with some believing yields are lower than they should be based on economic fundamentals.
Yields on the benchmark 10-year U.S. Treasury rose to 1.415% after the auction and stocks mostly turned lower. The S&P 500 fell 15.42 points, or 0.4%, to 4369.21, the Dow slid 107.39 points, or 0.3%, to 34888.79 and the Nasdaq declined 55.59 points, or 0.4%, to 14677.65.
Small-cap stocks, which tend to be sensitive to talk of rate increases, fell further, shedding nearly 2%.
Stocks continue to trade near records—all three benchmarks hit records on Monday. More-bullish investors talked up the bigger economic picture following the inflation report, saying stocks remained primed for further gains.
“We think the economy will keep expanding for the foreseeable future and thus the setup is for continued market gains later this year,” added Matt Peron, director of research at Janus Henderson Investors.
On Tuesday, 10 of the 11 major S&P 500 stock sectors fell. Tech stocks in the index held on to a 0.4% gain, as shares of Apple, Microsoft and others notched modest advances.
That was more than offset by declines across most of the rest of the market. Financial stocks counted as one of the biggest decliners as investors factored in earnings reports from some big banks.
JPMorgan Chase shares fell $2.35, or 1.5%, to $155.65 as the bank kicked off earnings season by saying second-quarter profit more than doubled, while markets revenue fell. Goldman Sachs fell $4.52, or 1.2%, to $375.98 after the bank reported profits that beat analysts’ expectations. And First Republic Bank was little changed after saying that profits rose in the second quarter.
Meanwhile, PepsiCo rose $3.45, or 2.3%, to $152.96 after the food-and-beverage giant reported earnings and lifted its full-year guidance.
Boeing shares dragged the Dow even lower after the plane maker said new production problems would lead to further delivery delays of its 787 Dreamliner. Shares fell $10.09, or 4.2%, to $228.20.
Virgin Galactic fell $2.93, or 7.2%, to $37.76, adding to Monday’s 17% loss that came after the space-tourism company said it could sell as much as $500 million in stock.
Overseas, the Stoxx Europe 600 closed little changed. In Asia, indexes rose. In Japan, the Nikkei 225 added 0.5% while in Hong Kong the Hang Seng Index rose 1.6%. In mainland China, the Shanghai Composite Index rose 0.5%.
Major U.S. stock indexes have climbed in recent sessions.
Photo: Richard Drew/Associated Press
—Sam Goldfarb contributed to this article
Write to Will Horner at William.Horner@wsj.com and Michael Wursthorn at Michael.Wursthorn@wsj.com
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