Yields are Sending a Warning, AI Isn't Listening

Intro

One of the reasons I love the stock market is because everyday brings its own flavor of chaos and unpredictability. After a brief intermission, the AI hype is back in full swing. BUT, inflation is also back in full swing and yields are sending us a sinister message about what the future holds. Potentially even more importantly, the S&P 500 is telling us that there are only a select few tickers where an investor can park their money and get a solid return, and that’s big AI.

Here’s the crazy part, both the 5Y and 10Y Treasuries broke above 5% this week, marking their highest level since June 2007. As for equities, on September 21 the S&P 500 had a nice gain of +1.49%, but only seven tickers hit 52-week highs. On that same day, 30 tickers hit 52-week LOWS. This is significant because disparity has only happened two other times in the last 100 years, December 21, 1999 and July 23, 1929 (shoutout to @jasongoepfert on X for bringing this research to light). And, just to add another hole to the slice of swiss cheese that is the stock market, we are likely going to get another rate hike at the next FOMC. Because why not, right?

What Happened

• Stronger-than-expected September business data helped push the 5-year Treasury above 5% and the 10-year above 5.1%. Both hit levels not seen since June 2007. A surge in yields is raising concerns that the Federal Reserve may need to maintain restrictive monetary policy for longer.
• AI investment showed renewed strength. August core capital goods orders increased 1.6%, exceeding expectations of 0.5% and providing additional evidence of “resilient” business investment.
• Market breadth is deteriorating. On September 21, seven stocks made fresh 52-week highs, but 30 made fresh 52-week lows. This suggest the rally is extremely narrow and broad-based confidence in the market is absent. This particular disparity has only happened two other times in history, December 21, 1999 and July 23, 1929.

Note:

Breadth is basically the gap between stocks that have prices moving in different directions. It allows investors to see if a bullish day is a market-wide rally or if it’s just a few select names. Typically in a healthy market breadth is high, and in an unhealthy market it’s low.

Why It Matters

The bond market is raising the cost of money. A 10-year Treasury yield above 5.1% affects considerably more than just government bonds. Mortgage rates, corporate financing, business investment and equity valuations all feel the effects of higher borrowing costs. This is especially important for growth companies, including those participating in the AI buildout. When investors can earn 5% on Treasury securities, they generally demand greater compensation for taking risks elsewhere, making expensive valuations harder to justify.

Are you starting to see the bigger picture? We have yields surging, the headline S&P 500 number near record-highs, strong deterioration in market breadth, and we’re in a hiking cycle.