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* Goldman shares drop as profit hit by weaker trading

* Benchmark U.S. Treasury yields jump to two-year highs

* Activision soars on $68.7 billion Microsoft deal (Updates with close of U.S. market)

Jan 18 (Reuters) - Wall Street's main indexes fell sharply on Tuesday as weak results from Goldman Sachs weighed on financial stocks and tech shares continued their sell-off to start the year as U.S. Treasury yields rose to milestones.

Goldman Sachs https://www.reuters.com/business/finance/goldman-sachs-profit-misses-estimates-weak-equity-trading-2022-01-18 shares tumbled after the investment bank missed quarterly profit expectations amid weak trading activity. The financials sector, which has been one of the better-performing groups in 2022, slumped.

“The financials crumbling a little bit under the weight of less-than-impressive earnings quarters is probably the biggest factor today,” said Chuck Carlson, chief executive officer at Horizon Investment Services in Hammond, Indiana. “When you have taken out potentially one of the areas that actually was working here, that kind of casts a pall on the market.”

Benchmark U.S. Treasury yields jumped to two-year highs and two-year yields breached 1% as traders prepared for the Federal Reserve to be more aggressive in tackling unabated inflation.

The steep ascent in yields to start 2022 has weighed in particular on tech and growth stocks, whose future expected cash flows are discounted more sharply as yields rise.

“The hot inflation prints have spooked the market that the Fed is going to move and so we are seeing this rise in yields,” said Mona Mahajan, senior investment strategist at Edward Jones.

"It’s not only the rise in yields but the rapid rise in yields ... that really does cause some indigestion in the market, but particularly in growth, higher valuation, more speculative asset classes,” Mahajan said.

According to preliminary data, the S&P 500 lost 83.85 points, or 1.80%, to end at 4,579.00 points, while the Nasdaq Composite lost 379.05 points, or 2.54%, to 14,514.71. The Dow Jones Industrial Average fell 533.17 points, or 1.48%, to 35,383.30.

A BofA survey showed that fund managers had cut their overweight positions in tech to their lowest levels since 2008, while another survey by Deutsche Bank found that a majority of respondents believed U.S. technology stocks are in bubble territory.

Investors are zeroing in on next week's Fed policy meeting for more clarity on central bankers' next moves to rein in inflation. Data last week showed U.S. consumer prices increased solidly in December, culminating in the largest annual rise in inflation in nearly four decades.

In company news, Activision shares soared after Microsoft announced a deal to buy the video-game maker for $68.7 billion.

(Reporting by Bansari Mayur Kamdar, Shreyashi Sanyal, Sruthi Shankar in Bengaluru, Sinéad Carew and Karen Brettell in New York and Danilo Masoni in Milan; Editing by Maju Samuel and Lisa Shumaker)