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The bond market and US 10yr are nearing a breaking point yet equities are at an ATH with signs that this bull market still has much more room to go. Let me explain why high yields don't break markets.
What we have here is the US10yr yield (now at 4.56%) vs the $SPX (S&P 500) over the last 30 years...The more I look at this, the more I think the right question is not simply “Are high rates bad for stocks?”
The better question is what type of high-rate environment are we in?
Because there is a major difference between what historically caused recessions and what historically confirmed them.
Several of the worst market declines over the last 25+ years were not always triggered by yields being high. They often happened after the bond market started sniffing out a real growth problem and after yields had already started collapsing.
In other words, the 10-yr breaking lower was not always the bullish “rates are falling” signal investors wanted it to be. Sometimes it was the market saying growth is cracking, capital is moving to safety, and the Fed is probably behind the curve.
IF the 10-yr breaks down because inflation is cooling while earnings remain resilient, that can be bullish. That is the soft-landing version. Lower discount rate, still-good earnings, and risk assets can breathe.
But IF the 10-yr breaks down because unemployment is rising, credit spreads are widening, consumers are weakening, and earnings revisions are rolling over, that is not bullish. That is the recession version. Same move in rates but a very different message.
So what is happening right now?
Right now, the 10-yr is sitting near a major multi-decade resistance zone, and the S&P 500 is making new highs.
That combination tells me the market is pricing a world where nominal growth, fiscal spending, AI capex, and mega-cap earnings power are still strong enough to offset the drag from higher rates. THAT is the key point.
In 2000, 2007, 2020, and even partially in 2022, the breakdown in the 10-yr yield was less the cause of the equity correction and more the market suddenly pricing economic deterioration, liquidity stress, or an aggressive policy response.
Put differently, rising yields usually reflect nominal growth, inflation expectations, or economic momentum. Collapsing yields usually reflect fear, recession risk, or a liquidity event.
And this is where today gets interesting. We are not living in the same macro structure as prior cycles. The US fiscal deficit is much larger. Treasury supply matters more. Inflation is structurally more sticky. And AI infrastructure spending has become one of the largest private-sector capex cycles in modern history.
The AI capex boom is not just a tech story. It is flowing into so many different areas of the economy. Semiconductors, power, utilities, data centers, networking equipment, electrical infrastructure, and labor demand. That spending is helping hold up parts of the economy that normally would have rolled over faster under this level of rates.
Index concentration matters too. The S&P 500 today is not the same S&P 500 from 2000 or even 2010. A huge portion of index performance is now driven by a handful of mega-cap technology companies with fortress balance sheets, enormous free cash flow, global monopolistic distribution, and secular AI-driven demand.
That changes the transmission mechanism of higher rates. A regional bank, small-cap company, or heavily levered consumer company can struggle enormously in a 5% yield world. Microsoft, NVIDIA, Meta, or Alphabet do not necessarily struggle the same way because they internally finance growth through cash generation.
So the market is not ignoring rates. It is saying “Show me the earnings damage.” And so far, at the index level, there hasn't been any. The major contributors to the indexes and the economy have the strongest moats and earnings strength has never been stronger.
That is why traditional recession signals have looked “wrong” for longer than many expected.
The economy is bifurcated. Tthe lower-income consumer looks stressed, housing affordability is weak, small businesses face pressure, refinancing risk is real (Commercial real estate is still digesting a much higher cost of capital)
But at the same time, large-cap tech corporate earnings remain resilient because AI, software, cloud and infrastructure spending are offsetting broader weakness.
I also think people are too quick to compare the AI capex cycle to the late 1990s telecom and internet bubble. There are major differences. Alot of the 1990s infrastructure buildout was funded by companies that NEEDED the capital markets to stay open (and it was largely driven by debt)
Today, companies like Microsoft, Amazon, Meta, Alphabet, NVIDIA, Oracle are investing from a position of massive profitability. Yes, now they've begun tapping into the debt markets to accelerate the buildout, but they are doing it from a position of strength, not survival.
Whether the spending ultimately becomes excessive or will generate adequate returns is another discussion. Will there be overcapacity or will all this capex spend eventually disappoint? We shall see.
But, for now, the earnings impulse is real.
Hundreds of billions are being deployed into compute, networking, power infrastructure, chips, and data centers. That spending is flowing through the economy and supports nominal growth even while parts of the consumer economy weaken.
This is why the bond market matters so much from here.
Technically, yields look like they are attempting a breakout from a 20+ year base. And if yields do decisively break above this range and sustain above ~5%, I think the market eventually has a much harder time maintaining current multiples. Not necessarily because growth collapses immediately, but because the discount rate regime changes.
A sustained move above this macro resistance zone would tell me the market is repricing term premium, fiscal risk, or sticky inflation again, or some combination of all three. That would put pressure on long-duration assets and make the equity market far more dependent on earnings growth to justify valuations.
On the other hand, as long as the 10-yr is not breaking down in a disorderly way and not breaking out above this long-term resistance zone, the market can still have legs.
It gives equities room to keep climbing, especially if the earnings engine remains concentrated in companies with real cash flow, pricing power, and balance sheet strength.
Remember, the market tends to break when the bond market suddenly realizes growth is deteriorating faster than expected. And right now, that is NOT what the bond market is saying.
If anything, the bond market is currently saying the exact opposite. Nominal growth + inflation are more durable than people expected.
Now does that mean there is no risk? Of course note. At some point higher rates matter.
Private credit reprices (it already has shown signs of fracturing), refinancing risk increases, government interest expense explodes higher (which is currently not sustainable), equity risk premiums compress, and weaker balance sheets start to run out of time as liquidity conditions tighten materially.
Higher rates work with long and variable lags. But the nuance is markets do not top simply because yields are high. They top when liquidity deteriorates, earnings roll over, credit spreads widen, AND THEN yields collapse because the market starts pricing recession.
Right now, we don’t yet have that full sequence. What we have instead is sticky nominal growth, sticky inflation, resilient mega-cap earnings, AI-driven capex, and structurally large fiscal deficits supporting demand + keeping liquidity in the system.
That combination can sustain higher yields and higher equity prices simultaneously longer than most people expect.
The next move in yields does matter a lot. A controlled drift lower would likely help broaden the market. A breakout higher would pressure valuations. A sharp breakdown lower would probably mean the bond market is seeing something in growth that equities have not priced yet.
Until the 10-yr breaks decisively one way or the other, my view is that the bull market can continue, but the macro margin for error is getting thinner.
Commercial real estate, refinancing cycles, PE leverage, consumer credit deterioration, and government debt servicing pressure all compound slowly before they suddenly matter. Eventually there is a level where the cost of capital begins overwhelming even strong secular narratives.
But the difficult part is knowing where that threshold actually is and frankly, the market itself may not know yet either.
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