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Market Outlook

RISING US BOND YIELDS & FALLING AI STOCKS

ADMIN || 15th December 2025

The re-emergence of rising yields and sector rotation in the stock market last week suggest we’ve hit an inflection point which could work either for or against risk assets going forward.

A shift out of high-beta shares into cyclicals and the global rise in yields were the two themes that dominated a week in which the Federal Reserve cut interest rates for a sixth time in the last 15 months. That’s telling given that lower overnight rates are supposed to be stimulative.

After government data started to flow in mid-November, 10-year Treasury yields tumbled toward 4% resistance, even briefly breaking below that level. Without an immediate recession on the horizon, that helped shares rally and the S&P 500 reclaim its first record high since October.

At the same time, the impact of rising global bond yields had leaked enough into the US by the beginning of this week that 10-year yields started to bump up against the top of a trading range between 4% and 4.20%, undermining the highest beta of stocks. It didn’t help that Oracle has been making headlines for concerns about its debt-fueled data center binge and credit default protection costs akin to a junk-rated company. When the S&P 500 hit a record on Thursday, it was notable that the Nasdaq 100 sold off and cyclicals led the charge.

Looking at this through a bond market lens though, 10-year Treasury yields rising toward 4.20% isn’t that big a deal. Before shutdown angst and labor market weakness became palpable in September, 4.20% was actually a floor this year, especially after the Liberation Day tariff announcements, and breached only briefly.

This time though, the jittery stock market price action suggests a return of 4.20% as a floor would be the result of a shift in sentiment with two possible explanations. First breadth on Thursday was solid when the S&P 500 hit a fresh record. That’s marks a change from a rally that has been previously dominated by the Magnificent Seven. If an acceleration in economic growth courtesy of the Federal Reserve’s rate-cutting campaign broadens the stock gains, that’s good news for the rally.

The meltdown in Oracle’s shares points to another interpretation: Yields rising enough to choke off appetite for high beta assets like AI stocks and potentially forcing a re-think of the massive investment. That’s a less upbeat scenario.

Either way, next week’s data, the first somewhat current read on jobs and inflation since the government shutdown, will dictate the next move in the 10-year yield.

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