US 10-year yield at 4.7% hits tech stocks as AI slows

The 10-year US Treasury yield's return to 4.7% has triggered a sharper tech selloff than in May, as AI earnings momentum slows and mega-corporate bond issuance lifts term premiums. The S&P 500 declined 1.4% last week, with smaller companies falling 1.6%, leaving stocks 1.5% below their all-time highs.

"The rise in bond yields and the Treasury's purchases all set the stage for what will be a very important Jackson Hole speech next week," said Paul Stanley, managing director at Arca. "It seems as though Warsh wants the market to do the tightening for the Fed, and that's really what is happening with the recent surge in bond yields."

The 30-year Treasury yield reached 5.273% on Friday, up 3 basis points on the week, while the 10-year rose to 4.734% and the 2-year to 4.232%. In May, when the 10-year first touched 4.7%, US stocks and A-shares corrected briefly before resuming their uptrend as AI model ARR accelerated. The second episode, from mid-July onward, has been different: cloud capex growth is slowing, ARR expansion has decelerated, and mega-corporate bond issuance is competing with Treasury supply for long-duration capital.

The divergence comes down to the numerator. In May, accelerating AI model revenue justified higher discount rates; in July-August, slowing earnings momentum and rising term premiums have compressed both expectations and valuations simultaneously. Equity pricing is driven primarily by the earnings cycle, not interest rates.

Rates as a Conditional Variable

The impact of rising yields on asset prices depends on two factors: the source of the move (short-term rate expectations, inflation expectations, or term premium) and the slope of the earnings trend. When earnings improvement and discount rate increases happen simultaneously, the net effect depends on which moves faster.

Historical data supports this framework. Since 1990, the Dow's correlation with the 10-year Treasury yield is -0.41, while the Philadelphia Semiconductor Index's correlation is only -0.13. Both indices show stronger correlations with semiconductor sales growth at 0.20 and 0.40 respectively. The semiconductor index's pricing is driven primarily by the industry cycle, not rates. Across nine semiconductor cycles since 1990, the Philadelphia index's low points have led semiconductor sales by an average of two months, while high points lag by three months.

The A-Share Connection

For Chinese equities, the domestic 10-year government bond yield has almost no directional impact on tech stocks. The marginal pricing capital for A-share tech comes from private equity, margin financing, and foreign investors — none of which are sensitive to domestic risk-free rates. Chinese tech companies rely on equity refinancing rather than debt, so rate levels don't affect their capex decisions.

The US 10-year yield's impact on A-shares is also conditional. Short-term spikes hit crowded, high-valuation positions — the "Mao Index" in February 2021, the "Ning Portfolio" in January 2022 — but after the shock, stocks return to trend pricing based on fundamentals. US yields can add fuel to a rally but cannot rescue a weak market, as seen from November 2023 to January 2024 when yields fell more than 100 basis points but A-shares stayed weak because PMI remained below 50.

What This Means for Positioning

For investors, the framework suggests four scenarios based on the direction of the industry cycle and rates. When both move in the same direction, the industry cycle dominates and rates only affect the slope. When they move in opposite directions, the result is either a double boost or a double hit.

The current situation for AI: the industry trend remains upward, so the yield spike may cause temporary corrections but is unlikely to reverse the direction. However, the transition from aggregate-driven growth to structural differentiation means stock selection matters more than beta. The assets most exposed to rising yields are long-duration ones — stable cash-flow blue chips and unprofitable, high-valuation tech with distant cash flows — while companies in the middle of an industry boom are less affected by valuation compression.

Treasury Secretary Scott Bessent's decision to at least double debt repurchases, from $2 billion to $4 billion, has provided some relief to the long end. But as Neil Wilson, investor strategist at Saxo UK, noted: "This is probably more about the signal the administration wants to send to the market than the size of the operation — it's small potatoes vs the $40 trillion US government debt."

The dollar has weakened against major currencies as the Treasury's buyback program is seen as a form of financial repression, while gold's rise reflects growing concerns about fiscal risk and fiat currency depreciation. US recession odds remain exceptionally low at 8 percent, according to the analysis.

This article is for informational purposes only and does not constitute investment advice.