By Martin Baccardax

Stocks are on pace for a third consecutive day of declines amid a pullback in Treasury bond yields that could test investors betting on deeper Federal Reserve interest rate cuts over the coming months.

The S&P 500 was down 0.3% in Thursday trading, while the Nasdaq Composite was falling 0.2%.

The Commerce Department on Thursday published revised gross domestic product data that showed the U.S. economy expanded at a faster-than-expected 3.8% year-over-year clip over the second quarter. That was well ahead of Wall Street's forecast for the second reading, which called for 3.3% annualized growth -- and higher than the agency's initial reading of 3%. Consumer spending powered most of the advance, even amid trade uncertainty and a slumping stock market.

The Bureau of Labor Statistics, meanwhile, posted data that showed a big decline in the number of Americans filing for first-time unemployment benefits last week -- suggesting the labor market is holding firm into the end of the current quarter.

Collectively, the twin readings suggest a solid framework for the world's largest economy, but one that will likely lead to a pickup in inflation pressures that could slow the Fed's pace of easing interest rates.

"Even though these GDP revisions are backward looking, they paint a somewhat reassuring picture of the U.S. economy," said Bret Kenwell, chief U.S. investment analyst at eToro, adding that likely puts more emphasis on Friday's inflation report.

The Bureau of Economic Analysis will publish the latest reading of the personal consumption expenditures price index, the Fed's preferred inflation gauge, at 8:30 a.m. Eastern time on Friday. Economists tracked by FactSet expect core prices rose 2.9% year-over-year in August, matching the quickest pace since February.

Such a reading, however, could fuel investors' concerns that the Fed's recent focus on a slowing job market -- which represents one side of its dual mandate to deliver full employment with stable prices -- will leave the central bank exposed to renewed inflation pressures.

The solid reading for weekly jobless claims may not be enough to convince the Fed that the job market is improving, but it will certainly capture the market's attention until next week's September jobs report, said Chris Larkin, managing director for trading and investing at E*Trade from Morgan Stanley.

"There are still few signs of major cracks in the labor market," he said. "And if that picture remains intact, the Fed has one less reason to cut interest rates."

That is already being reflected in the bond market. The yield on the benchmark two-year Treasury note, which is highly sensitive to changes in interest rate forecasts, was higher at 3.663%.

The yield on the 10-year Treasury note, meanwhile, and was last changing hands at 4.201%, its highest level in three weeks.

Those moves, should they continue, will be crucial for U.S. stock performance heading into the start of the third-quarter earnings next month. Higher Treasury bond yields -- especially when they're tied to inflation concerns -- can weigh on markets and reduce the odds of Fed rate cuts.

The CME Group's FedWatch tool, which tracks rate bets in real time, pegs the chances of a quarter point reduction in October at around 83%. However, the odds for a third consecutive cut in December have fallen to around 62% -- a 20 percentage point decline in less than a week.

The S&P 500 has climbed this month, defying the historical record that pegs September as the most difficult portion of the year, and is set to end the fourth year of the current bull market in early October.

However, Chris Zaccarelli, chief investment officer at Northlight Asset Management, thinks corporate earnings can continue to improve, provided they are supported by a healthy economic backdrop. But he remains worried about the price investors are being asked to pay for that growth.

"Where we have our largest concern is with valuations," he said in remarks emailed to Barron's. "We agree that the economy is strong and growing and we have been impressed with corporations' ability to navigate a challenging environment and produce strong results, but a lot of that good news is already priced in -- and then some."

Write to Martin Baccardax at martin.baccardax@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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September 25, 2025 11:46 ET (15:46 GMT)

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