By Joe Wallace and Michael Wursthorn
Technology stocks rebounded from an early-morning rout Tuesday after Federal Reserve Chairman Jerome Powell signaled that an interest-rate increase from the central bank isn't imminent, easing some concern over rising bond yields.
Major stock indexes recouped a significant chunk of their losses after Mr. Powell told lawmakers that inflation remains soft, tamping down recent fears of a policy shift by the central bank following a spike in bond yields.
Earlier in the session, the tech-heavy Nasdaq Composite Index dropped as much as 4% and investor favorites including Tesla and Moderna logged double-digit losses. Portfolio managers said the moves marked a rotation out of the high-growth favorites of the past year and into more economically sensitive stocks such as banks and manufacturers.
"The economy is a long way from our employment and inflation goals," Mr. Powell said at a hearing of the Senate Banking Committee Tuesday morning. He reiterated that the Fed will continue to support the economy with near-zero interest rates and asset purchases until substantial progress is made.
Mr. Powell added that level of recovery "is likely to take some time."
Still, the Nasdaq remained down 0.6% in recent trading. The S&P 500, which was down as much as 1.8%, was off by about 0.1%. The broad stock market index is on course for its sixth consecutive session of declines, which would mark its longest losing streak in a year.
The Dow Jones Industrial Average, meanwhile, traded near the flatline after falling as much as 363 points earlier.
A sharp rise in yields on U.S. government bonds in recent days has sapped investors' appetite for riskier assets, including stocks. Shares in technology companies, which have powered the broader market higher for much of the past year, are seen as particularly vulnerable, thanks to high valuations. Their profits become less valuable in today's terms when investors apply a higher discount rate, thanks to rising 10-year Treasury yields.
The rise in bond yields "naturally does cause investors and cause markets to re-examine the view on equities," said Paul Jackson, global head of asset allocation research at Invesco. Investing in government bonds is beginning to look more attractive for the first time in months, he said.
But "the level at which bond yields become truly problematic for equities is a long way from where we are now," Mr. Jackson added.
Some investors say they are already re-evaluating their portfolios though. Most of those moves involve pulling some money out of growth stocks and putting some of those gains into reopening stocks and other companies more tied to the economy.
Tuesday's favorites included casinos Wynn Resorts and MGM Resorts International, which were up 6.5% and 4.8%, respectively, and Walt Disney, up 3.2%. Airlines, including Southwest Airlines and Alaska Air Group, were also trading higher.
"We've been emphasizing more the broader economy and getting exposure to midsized companies," said Tom Hainlin, national investment strategist at U.S. Bank Wealth Management. The move in yields has also revived interest in pockets of the fixed-income market, Mr. Hainlin added, specifically nonagency mortgage backed securities and corporate debt.
Bond yields, which move opposite of prices, also eased following Mr. Powell's comments, helping to take some heat off the stock market. The yield on the 10-year U.S. Treasury note was at 1.359% from as much as 1.381% earlier in the day. Yields remain below pre-pandemic highs, but investors say it is the speed at which yields have increased, rather than their level, that is hurting stocks.
"At the moment, none of those indicators are flashing red -- they are not even amber yet -- but they are not as green as they were six months ago," she said, referring to the level of yields and expectations of when the Fed is likely to raise interest rates.
Tesla fell 3.7% after declining almost 9% on Monday. The move came as the price of bitcoin slid about 8% to $48,506.40, according to CoinDesk.
The latest bout of volatility in cryptocurrency markets followed comments by Tesla Chief Executive Elon Musk, who said over the weekend that prices for bitcoin and ethereum seemed high. The electric-vehicle maker earlier this month disclosed that it had bought $1.5 billion in bitcoin. Mr. Musk has also become a prominent cheerleader for cryptocurrencies.
Shares of technology firms and other stocks that have performed well during the pandemic came under pressure. Palantir Technologies extended its recent slide, losing 6.2%. Payments firm Square fell 7%. It is due to report earnings after markets close, along with security-software company McAfee.
Home Depot said growth could slow this year, pulling shares down 3.5%.
Other corners of the stock market considered overheated also swooned.
Shares of blank-check companies broadly fell, with an ETF dedicated to the trend, the Defiance Next Gen SPAC Derived ETF, shedding 6.5%. Reddit-darlings including GameStop and Magnite fell 4% and 14%, respectfully.
Overseas, the Stoxx Europe 600 shed 0.4%, led lower by tech stocks. In Asia, Hong Kong's Hang Seng climbed 1% and China's Shanghai Composite Index slipped 0.2%.
Write to Joe Wallace at Joe.Wallace@wsj.com and Michael Wursthorn at Michael.Wursthorn@wsj.com
(END) Dow Jones Newswires