U.S. stocks experienced a significant slump on Monday as higher bond yields, driven by a strong U.S. economy, intensified the pressure on Wall Street. The S&P 500 fell 1.2%, adding to last week's 1.6% loss, marking its worst performance since October. The Dow Jones Industrial Average dropped 248 points, or 0.7%, while the Nasdaq composite slumped 1.8%.

Earlier in the day, stocks were showing strength as oil prices eased on hopes of international efforts to deescalate tensions in the Middle East. However, Treasury yields surged following a robust report on the U.S. economy that surpassed expectations. This created a dilemma for the economy and financial markets. While a strong economy raises hopes for increased profits at companies, it also dampens prospects for lower interest rates from the Federal Reserve - the two main factors determining stock prices - leading Wall Street in conflicting directions.

Traders have been hoping for lower interest rates, which can stimulate economic growth. Much of the recent climb of the U.S. stock market to record levels has been fueled by expectations of rate cuts. However, Monday's report, which revealed that U.S. shoppers spent more at retailers last month than anticipated, caused traders to revise their outlook. Data from CME Group indicates that traders now expect only one or two rate cuts this year, down from expectations of six or more at the beginning of the year. Some traders are even preparing for the possibility of no cuts due to inflation and the overall economy consistently outperforming forecasts.

High interest rates and bond yields negatively impact the prices of various investments, particularly those that appear overpriced or compete with bonds for investor attention. Consequently, real-estate investment trusts (REITs) suffered some of the steepest losses in the stock market on Monday. With higher bond yields providing greater returns, investors may be less inclined to invest in real-estate stocks, which typically offer relatively high dividends. Moreover, high rates can exert pressure on real estate prices overall. Notably, office owner Boston Properties experienced a 3.2% decline.

Tech giants, often beneficiaries of low interest rates, also faced significant weakness. Apple dropped 2.2%, Nvidia fell 2.5%, and Microsoft sank 2%. As the largest stocks on Wall Street, their movements carry substantial weight on the S&P 500 and other indexes. Microsoft, for instance, swung from an early gain of 1.2% to an afternoon loss, becoming the second-largest factor driving the decline of the S&P 500.

Despite the overall negative sentiment, some financial companies reported encouraging earnings for the start of the year, helping to mitigate the losses. However, with interest rates appearing less likely to provide support in the near term, companies are now under pressure to deliver stronger profits.

The ongoing battle between rising bond yields, reflecting a robust U.S. economy, and hopes for lower interest rates from the Federal Reserve continues to create uncertainty in the stock market. Traders will closely monitor any further developments that could sway the direction of stocks in the coming days.