A sustained move above 5% in the U.S. 10-year Treasury yield could create trouble for equities and put particular pressure on artificial intelligence-linked stocks, according to Breakout Capital founder and chief investment officer Ruchir Sharma, speaking to CNBC.
Sharma said that if markets enter a new interest-rate regime in which the 10-year U.S. Treasury decisively breaks above 5%, that would be a negative development both for equities broadly and for the AI trade. He described the 10-year Treasury as “the most important asset in the world,” arguing that it directly shapes stock valuations while also setting the baseline for mortgage rates, auto loans and other borrowing costs across the economy.
In his view, once the 10-year yield rises above 5%, the relationship between stocks and bonds changes. Citing historical data, Sharma said the equity-bond correlation turns positive at that point. “For any yield above 5.25%, equity prices go down,” he said.
Higher bond yields hurt stocks by lifting the discount rate investors use to value future profits. That reduces the present value of those earnings and, in turn, makes shares less valuable today. Earlier this week, the 10-year Treasury yield touched 5%, reaching a 19-year high, before easing by 5 basis points on Thursday to 4.94%.
The article says rising yields have been driven in part by elevated oil prices linked to the Middle East war and record diesel prices. Last week, Brent crude, the global benchmark, moved above $100. Supply shocks in energy inventories are adding to inflation concerns just as the Federal Reserve tries to restore price stability. Inflation has remained above the central bank’s 2% target for five years, the report notes.
On Wednesday, the Federal Reserve raised the federal funds rate by a quarter percentage point to a range of 3.75% to 4% in an effort to tighten monetary policy and curb price pressures. Policymakers also signaled that another increase could come later this year, while Fed Chairman Kevin Warsh said inflation remains too stubbornly high.
Sharma said the prospect of persistent inflation creates another complication for stocks. The Fed expects inflation to remain above its 2% target until 2029, suggesting that rates may have to move even higher. He added that major market booms or bubbles have typically ended the same way: “when interest rates go up and monetary tightening” takes hold.
Above 5%, he argued, the government’s fiscal backdrop also worsens because servicing more than $40 trillion in debt becomes more expensive. Sharma warned that if the 10-year yield becomes “unhinged,” markets could run into serious problems. He noted that the government’s balance sheet is now three times as bloated as it was in the 1990s, when it posed less competition for corporate borrowers in the bond market during the dot-com boom.
Today, the report says, mega-cap AI companies are also turning to the bond market as spending on AI infrastructure eats into free cash flow. Goldman Sachs wrote in a note to clients on Thursday that while technology earnings remain strong, the combination of a higher cost of capital and greater capital intensity in the tech sector has reduced the value of future cash flows. As a result, the bank said, their forward valuation measured by price-to-earnings is now close to the average for the rest of the market.
Even so, Sharma pointed to one important difference from earlier periods of market stress: corporate balance sheets are in better shape today than they were in the 1990s.
