By Will Horner
Tech shares fell in early trading Wednesday as investors bet that the Democrats were poised to take control of the Senate following early results from Georgia's runoff elections.
The Nasdaq Composite Index declined 1% on expectations that a Democrat-controlled Congress would lead to higher taxes and tighter regulations on tech giants. The broader S&P 500 fell 0.4%, while the Dow Jones Industrial Average lost 0.2%.
The Russell 2000, which tracks smaller stocks, jumped in premarket futures trading. Both the Dow and Russell are filled with companies beaten down by the coronavirus pandemic that stand to benefit from higher fiscal spending.
A change of control in the Senate is seen by some as a catalyst that could shift the types of stocks favored by investors away from names that dominated last year's rally. Big tech companies were getting hit hardest in premarket trading. Facebook fell 2.3%, while Twitter, Netflix and Alphabet all fell 1.8%.
"The negativity today is concentrated in these large cap, growth stocks, where, frankly, valuations are already quite high," said Mike Bell, a global market strategist at J.P. Morgan Asset Management.
Meanwhile, stocks hit hard by the pandemic such as banks, industrials and small companies were poised to rise. Bank of America and Citigroup all rose more than 3% premarket. "You are going to see the market viewing this as positive for the value stocks because of fiscal stimulus, " Mr. Bell said.
The yield on the benchmark 10-year U.S. Treasury rose above 1% for the first time since March, before pulling back. The yield, which rises as the price falls, was up at 0.994%, from 0.955% on Tuesday.
In the elections in Georgia, two races that will determine which party has control of the Senate, the Democrats flipped one Republican seat and maintained a narrow lead in the second race, which was too close to call.
Investors are closely following the results, betting that a "blue sweep, " Democratic control of both the Senate and the House of Representatives, would make it easier for President-elect Joe Biden's administration to pass new legislation.
Such an outcome could scramble investors' expectations for government policy. It would increase Mr. Biden's chances of pushing through higher corporate and capital-gains taxes. He has promised greater scrutiny of tech giants that have powered the stock-market rally in recent years and an expansion of health-care benefits.
A Democratic-controlled Washington would also boost the possibility of more fiscal stimulus, said Seema Shah, chief strategist at Principal Global Investors. That will help lift government-bond yields, which track expectations for growth and inflation. More government spending supports stocks hit hardest by the pandemic, such as airlines and car companies.
But with Democratic control of the Senate likely to be razor thin, the legislative agenda would be tempered, she said.
"Once the clouds have cleared, the market will realize that, yes, this is a blue sweep but it is a very, very marginal one," she said. "It is certainly not the status quo we have been used to but I also wouldn't expect that much of a change."
AmerisourceBergen rose 4% is premarket trading after the pharmaceutical wholesaler said it would buy most of Walgreens Boots Alliance's Alliance Healthcare businesses for around $6.5 billion.
In overseas markets, European stocks rose, with the Stoxx Europe 600 up 0.9%.
Treasury yields dragged European government-bond yields higher, with the German benchmark 10-year bund yielding minus 0.55%, from minus 0.58% Tuesday.
European bank stocks jumped as higher bond yields tend to benefit their profit margins. Standard Chartered led the gains, rising 8.8%. Barclays and HSBC each rose more than 7%.
The Federal Reserve will release minutes of its December policy meeting at 2 p.m. ET. The central bank used the meeting to say purchases of government debt and mortgage securities would continue until substantial progress toward broader employment and inflation targets had been met.
Investors are awaiting data on activity in the service sector and on factory orders, which are due at 9:45 a.m. and 10 a.m., respectively.
In commodity markets, Brent crude, the international benchmark for oil, rose 0.5% to $53.89 barrel. Gold prices fell 0.6% to $1,943.00 a troy ounce.
In Asia, stock markets were mostly lower. Japan's Nikkei 225 fell 0.4% while South Korea's Kospi fell 0.8%. In Hong Kong, the Hang Seng was up 0.2% while China's Shanghai Composite rose 0.6%.
Write to Will Horner at William.Horner@wsj.com
(END) Dow Jones Newswires
01-06-21 0947ET
