Bond markets have been the story on Wall Street this week, and their moves are spilling into stocks.
On Wednesday, the benchmark 10-year Treasury yield climbed to its highest level since 2007, after a widely followed S&P Global survey showed U.S. business activity growing at its fastest pace in five years. That is normally good economic news, but for markets it read as a sign that inflation pressure is not fading the way investors had hoped, especially with oil prices also climbing this week. The 5-year Treasury yield touched 5% for the first time since 2007 as well. Higher yields matter because they represent the return investors can get on relatively safe government debt; when that return rises, it makes stocks, especially the high-growth technology names that have driven this year's rally, look comparatively less attractive, since investors discount future profits more heavily against a higher risk-free rate.
The reaction in stocks on Thursday showed the strain: futures on the Dow Jones Industrial Average, the S&P 500, and the Nasdaq-100 all pointed lower in early trading, with the Nasdaq-100 leading declines. Small-cap stocks in the Russell 2000, which are typically more sensitive to borrowing costs, have swung sharply session to session this week as investors weigh rate expectations. Underlying all of this is a genuine tension: corporate earnings for the S&P 500 are expected to grow more than 30% in 2026, well above the long-run average, powered heavily by AI-related spending and technology profits, and investors do not want to abandon that growth story just because bonds got more attractive.
Adding to the uncertainty, traders have been raising their bets on a second Federal Reserve rate hike at its October meeting, which would be unusual timing so soon after the September increase and would mark a firmer break from the low-rate era of the past several years.
Watch the 10-year and 5-year Treasury yields over the coming days; further increases would likely keep pressuring high-growth tech stocks, while any pullback in yields could give the market room to rally.
Why do rising bond yields hurt stocks?
Higher yields make relatively safe government bonds more attractive and cause investors to value future company profits, especially from high-growth tech firms, less generously today.
What is driving yields higher right now?
Strong business activity data and rising oil prices have both fed inflation worries, and traders now see a higher chance the Fed raises rates again in October.