By Johann M Cherian and Tharuniyaa Lakshmi
Oct 1 (Reuters) - Wall Street's main indexes slipped on Thursday as a deepening bond selloff drove Treasury yields to multi-decade highs, outweighing gains in software stocks.
Although AI enthusiasm continues to power U.S. stocks, soaring Treasury yields are testing investors' appetite for richly valued shares as inflation and government borrowing keep interest-rate concerns firmly in focus.
Global bond markets came under renewed pressure, with the yield on the benchmark
10-year Treasury note touching 5.3445%, its highest since 2002, a day after Treasuries logged their worst quarter since 1994.
"When a safe government bond pays more than 5%, stocks have to earn their keep. Company profits become the whole story," said Brian Jacobsen, chief economist, Annex Wealth Management.
"Third-quarter earnings reports start in mid-October. They are the next big test."
Rate-sensitive stocks fell, with housing down 1.4% and banks shedding 2.2%. Bond proxies real estate, utilities and consumer staples sector indexes were all in the red.
The Cboe VIX index, seen as Wall Street's fear gauge, climbed to a two-week high and was last at 17.23 points.
Technology was a pocket of strength, with software shares rallying on results from Accenture, which climbed 22% after the consulting firm forecast full-year revenue growth above estimates. Rival Cognizant climbed 10%, while blue-chip IBM gained 4.2%.
The S&P 500 software index firmed 1.7% to its highest since November, outperforming the broader tech index's 0.3% advance.
"A lot of institutions feel they're underinvested in software. That was clearly the case with Accenture, and investors are quickly reevaluating their views on the company," said Steve Sosnick, chief market analyst at Interactive Brokers.
Micron Technology's better-than-expected revenue forecast and $32 billion customer commitments under its supply agreements reinforced faith in the AI trade. Micron shares, however, slipped about 0.9% after nearly quadrupling this year.
At 10:27 a.m. the Dow Jones Industrial Average fell 231.69 points, or 0.46%, to 50,674.36, the S&P 500 lost 15.85 points, or 0.22%, to 7,635.69 and the Nasdaq Composite lost 18.52 points, or 0.07%, to 26,842.55.
Wall Street had a rocky September, with the S&P 500 and Dow posting monthly declines during what has historically been a weak month for equities, while enthusiasm around AI helped the Nasdaq notch gains.
Softer-than-expected inflation data bolstered expectations that the Federal Reserve would hold rates steady in October, with traders pricing in a 63% chance of a pause, while a December hike remained possible as inflation stayed above the Fed's 2% target.
On the data front, weekly jobless claims pointed to continued labor market resilience, with unemployment benefit applications falling and layoffs easing in September.
However, Minneapolis Federal Reserve President Neel Kashkari said that the job market was not a key driver of inflation and that labor market pain would not be needed for the central bank to achieve its inflation goal.
Comments from policymakers Thomas Barkin, Christopher Waller, Philip Jefferson, Michelle Bowman and Lorie Logan could offer further clues on the policy path.
Among other stocks, Constellation Energy rose 3% after the utility signed a 20-year power purchase agreement with Amazon.com.
Declining issues outnumbered advancers by a 2.48-to-1 ratio on the NYSE and by a 1.86-to-1 on the Nasdaq.
The S&P 500 posted three new 52-week highs and 35 new lows while the Nasdaq Composite recorded 17 new highs and 171 new lows.
(Reporting by Johann M Cherian and Tharuniyaa Lakshmi in Bengaluru; Editing by Arun Koyyur and Anil D'Silva)
