Mixed Signals. Rising bond yields are becoming more and more difficult for Wall Street to ignore.

The Nasdaq Composite tumbled 1.1% on Wednesday, while the S&P 500 fell 0.8%. The Dow Jones Industrial Average fell 352 points, or 0.7%.

A solid majority of S&P 500 stocks struggled in the face of rising bond yields. Of the 11 major sectors, energy was the only one that rose.

The stock market was following the bond market, and an auction on 5-year Treasury notes that Mizuho's Daniel O'Regan described as "disastrous."

In the wake of weak demand at that auction, the yield on 5-year note briefly crossed 5% and settled at its highest level since 2007. The yield on the 30-year Treasury note hit 5.4%, while the 10-year yield was up to 5.11%.

"The market is basically saying two very different things at once: Bond investors are becoming increasingly uncomfortable with the fiscal backdrop, while equity investors are still willing to pay up for AI-driven growth," O'Regan writes. "At some point, one of those views is probably going to have to give."

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The Hot Stock: Palo Alto Networks +5.0% The Biggest Loser: Paychex -8.8%

Best Sector: Energy +1.0% Worst Sector: Communication Services -1.9%

Wall Street Sizes Up a Blue Wave

With the midterm elections a little more than a month away, Wall Street is bracing for the possibility that Democrats take control of Congress.

Prediction markets traders on Kalshi forecast a 65% chance that Democrats win control of the Senate, and a 92.4% chance they take the House of Representatives.

A Democratic sweep would leave one party in control of the executive branch and another in control of the legislative branch. Wall Street typically pines for that kind of split, since gridlock limits the potential for partisan surprises to affect business.

Of course, a so-called "Blue Wave" could also have investors thinking ahead to 2028, according to Citi strategist Scott Chronert. He writes that while President Donald Trump could veto any legislation put forth by Democrats that could be bad for businesses, a Democratic president could be handed "a policy backlog" to enact starting in 2029.

A Dem sweep may begin to price '28 policy risk, mainly higher corporate taxes and AI infrastructure guardrails. This scenario hands key committees to Democrats, a marginal negative in our view for the AI trade and previous deregulation beneficiaries.

Even so, Chronert actually views the midterms as a "fundamental non-event for S&P 500 fundamentals across all likely outcomes." On the positive side for markets, he thinks Democrats in control of Congress could curtail tariffs, and the war in Iran.

We caution a Dem sweep is not entirely market-negative. We have argued that the S&P 500 would be higher absent tariffs and the Iran conflict-both headwinds built up under the current Administration. To the degree a Dem sweep curtails or diminishes Executive tariff and war powers, we see potential for a positive market response.

Let the countdown to Election Day begin.

The Calendar

Costco Wholesale and Darden Restaurants announce quarterly results tomorrow.

President Donald Trump and Chinese counterpart Xi Jinping are scheduled to hold talks at the White House. They are expected to discuss tariffs, trade agreements, the Iran war, Taiwan, and artificial-intelligence safety. The leaders of the world's two largest economies met in May in Beijing, and have so far agreed to pause further escalating the trade war.

The Census Bureau reports new-home sales for August. Economists forecast a seasonally adjusted annual rate of 616,000 new single-family homes sold, slightly more than in July.

-Dan Lam

What We're Reading Today

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