AI Bull Is Feeling It Again, But 10 Year Yield Is Waving A Red Flag

Well I am not going to deny, this past week has been one of the most interesting weeks I can remember.

First, after Nvidia’s big announcement with Wall Street a week ago, everyone can sense that the AI bull is feeling it again.

After a period of hesitation, the market's favorite trade is galloping once more, almost as if the message is: “We are in charge, Capex rules!”

Then there is another voice getting louder.

The 10-year Treasury yield is waving a red flag: “I am approaching a 20-year high, and I don't know where I am going. So buckle up, guys.”

That tension may define the next phase of the market.

The 10-year yield is approaching territory that deserves respect. More importantly, the long end of the Treasury curve has been challenging a multi-year resistance level.

The last time the 10-year yield decisively broke through a two-plus-year resistance range was in December 2021.

What followed was not subtle.

The S&P 500 eventually suffered a 25% drawdown, while the NASDAQ experienced a much deeper 35% decline.

History obviously does not repeat itself mechanically. The macroeconomic environment today is very different from 2021. But the message is worth remembering: when long-term rates undergo a structural repricing, equity valuations can change very quickly.

And this time, the market has another variable that did not exist in anything close to its current form in 2021: AI.

There is a growing camp of investors who believe the answer is yes.

The argument is straightforward: AI is producing genuine productivity gains, and those gains are beginning to show up in corporate earnings.

A large majority of S&P 500 companies have been beating earnings guidance and raising their forecasts for the remainder of 2026. If AI continues to improve productivity, margins, and revenue growth, perhaps the economy can absorb higher interest rates without the valuation compression that normally accompanies a rising long-term yield.

This is an important debate.

If AI merely represents another investment cycle, higher rates could eventually expose excessive valuations and excess capital spending.

But if AI is actually increasing the productive capacity of the economy, then the market may be able to tolerate a higher cost of capital because the underlying earnings engine is becoming stronger.

That is the bullish argument.

The bond market, however, has not completely signed off on it.

Wednesday brought one of the more unusual developments of the week.

Before the market opened, the Treasury Department stepped in with a massive liquidity operation that helped support Treasury prices and push yields lower.

The market's response was immediate.

Risk assets loved it.

Crypto broke higher, with Ethereum gaining nearly 10% and Bitcoin roughly 6%. Both reclaimed their 100-day moving averages, turning what had been a fragile setup into something considerably more constructive.

Perhaps even more interesting was what happened next.

The Fed minutes carried a decisively hawkish tone. Normally, that should have been enough to put some pressure on risk assets.

It didn't.

The market continued higher through Friday.

That reaction may be more important than the Fed minutes themselves.

The market was given a hawkish signal from the Fed, a historically elevated long-term yield, and still chose to buy risk.

That tells us something about positioning and sentiment.

Our momentum scores also picked up some interesting changes this week.

One of the biggest improvements came from biotech and genomics.

Much of this move can be attributed to Moderna (MRNA) and the excitement surrounding its progress in personalized cancer vaccines. The market is once again showing its willingness to reward breakthroughs that could potentially create entirely new markets rather than simply improve existing products.

Agriculture and fertilizer also showed meaningful momentum improvement.

NTR, MOS, and CF all gained roughly 10+ points in our momentum scoring system.

This is exactly the type of movement we want to watch: not simply which sector is performing well today, but where momentum is changing underneath the surface.

There is an unusual tug-of-war happening right now.

On one side, the 10-year Treasury yield is near a 20-year high, and a sustained breakout in long-term rates would be a serious risk to equity valuations.

On the other side, something happened this week that surprised the market: the Treasury Department demonstrated that it is willing to intervene aggressively to keep liquidity conditions favorable and the long end of the curve under control.

Whether that strategy works over the long run is debatable.

But markets trade the present, not the philosophical debate about what should happen eventually.

And the key observation from this week is this:

Even a decisively hawkish Fed tone did not derail the risk trade.

If the Treasury is also motivated to do whatever it can to prevent long-term rates from getting out of control, the market has effectively been given another reason to stay in risk-on mode.

We therefore remain constructive on risk assets—at least for now.

Our view is that the risk trade remains ON, potentially through the 2026 midterm period, unless the 10-year yield decisively breaks higher and stays there.

The bond market remains the biggest variable to watch.

The AI bull cycle may be shouting “We're in charge!”

For now, we're listening.

But we're also keeping our eyes on the 10-year, especially going into the end of 2026.

If the bond market starts screaming loud, we could potentially experience some really bumpy roads ahead.