The aBP Weekly: Rising Bond Yields Are Testing the Stock Market Again

Wall Street received another reminder this week that strong corporate earnings and enthusiasm around artificial intelligence are not the only forces determining stock prices. After spending much of August close to record highs, U.S. equities came under pressure as long-term Treasury yields moved sharply higher, forcing investors to reconsider how much they are willing to pay for future earnings. The S&P 500 declined 1.4% for the week, while the technology-heavy Nasdaq Composite fell 2.1%. The Dow Jones Industrial Average lost 0.8%, and the Russell 2000 declined 1.6%. Stocks recovered somewhat on Friday, but the rebound was not enough to erase losses accumulated earlier in the week. According to AP, the S&P 500 gained 0.4% on Friday while the Dow rose 1.0%.

The important story, however, was not simply that stocks declined. It was where investors moved their money. Technology stocks struggled as yields increased, while Energy emerged as one of the market's stronger sectors. With NVIDIA earnings and the Federal Reserve's Jackson Hole symposium approaching, investors now face two important questions: can AI earnings continue justifying elevated technology valuations, and will interest rates remain higher for longer?

Source: Investopedia

Why Bond Yields Matter for Stocks

The relationship between bonds and stocks can sometimes appear complicated, but the underlying principle is relatively straightforward. A stock represents a claim on a company's future cash flows. Investors therefore estimate what those future cash flows are worth today using a discount rate. When interest rates rise, the rate used to discount those future earnings generally rises as well, reducing their present value. This effect is particularly important for growth companies.

Many technology businesses trade at premium valuations because investors expect them to generate substantially higher earnings several years into the future. When Treasury yields are low, investors are generally willing to pay more today for those future earnings. When yields rise, those distant cash flows become less valuable in present-value terms. That is why movements in the bond market can have such a powerful effect on technology stocks even when nothing fundamental has changed at the underlying companies. This week provided another example.

The 10-year U.S. Treasury yield approached 4.7%, while the 30-year yield moved above 5.2%, increasing pressure on equity valuations. The rise in yields contributed to weakness across technology and other growth-oriented areas of the market as investors reassessed the relative attractiveness of stocks versus increasingly competitive returns available in fixed income.

Technology Takes the Pressure

Technology was among the areas most affected by this week's move in yields. The Nasdaq Composite's 2.1% weekly decline was larger than the losses recorded by the S&P 500 and Dow, reflecting the index's greater exposure to technology and other growth companies. This does not necessarily mean the fundamental AI investment story has weakened. Demand for artificial intelligence infrastructure remains substantial. Hyperscalers continue investing heavily in data centers, semiconductors, networking equipment and cloud infrastructure. Recent results from companies such as Microsoft have demonstrated that some of these investments are already translating into measurable revenue growth. But there is an important difference between a good company and a good investment at any price. As valuations rise, investors require increasingly strong earnings growth to justify those prices. Higher Treasury yields raise that hurdle even further. This is why the market's attention now turns toward NVIDIA.

NVIDIA Faces an Important Test

NVIDIA reports quarterly results next week, and the earnings release could become one of the most important tests of the AI trade this quarter. Expectations are already extremely high.

Investors will be watching data-center revenue, demand for NVIDIA's latest AI accelerators, gross margins and management's outlook for future infrastructure spending. But the larger question extends beyond NVIDIA itself. Is AI demand growing quickly enough to justify the valuations being assigned across the entire AI ecosystem?

NVIDIA sits near the center of the AI infrastructure investment cycle. Its results therefore provide information not only about semiconductor demand but also about spending by Microsoft, Alphabet, Amazon, Meta and other major technology companies building AI infrastructure.

A strong report could reassure investors that recent technology weakness has primarily been a valuation and interest-rate adjustment rather than a deterioration in AI fundamentals.

A disappointing report would be more consequential. With technology valuations already facing pressure from higher bond yields, weaker-than-expected AI demand could force investors to reassess growth expectations across semiconductors, networking, data centers and other AI-related industries. That makes next week's earnings particularly important.

Energy Moves in the Opposite Direction

While technology struggled, Energy was one of the strongest areas of the market this week.

The sector gained more than 3% through Thursday as crude oil prices strengthened and investors rotated toward companies whose earnings are more closely tied to current commodity prices and cash flows. The divergence between Energy and Technology provides a useful illustration of how higher interest rates can affect different parts of the market. Energy companies generally generate a larger portion of their expected cash flows in the present rather than relying on aggressive assumptions about earnings many years into the future. That makes their valuations less sensitive to changes in long-term discount rates.

The current fundamental backdrop has also been supportive. Global refined-product markets remain tight, with disruptions affecting refinery output and product exports in several regions. Strong crack spreads have consequently supported exceptional profitability among U.S. refiners.

This week therefore demonstrated something investors sometimes forget during periods dominated by one investment theme: market leadership changes. Technology and AI remain important long-term opportunities, but diversification across sectors becomes increasingly valuable when interest rates and economic conditions begin changing.

The Bond Market Is Sending a Message

Perhaps the most important question is why Treasury yields are rising.

Bond yields reflect several factors, including expectations for inflation, economic growth, Federal Reserve policy and government borrowing. Recent economic data have created a complicated picture. The labor market has shown signs of cooling, while retail spending has also weakened. Normally, softer economic activity would place downward pressure on interest rates because investors would expect the Federal Reserve to become more accommodative.

At the same time, however, inflation remains above the Fed's long-term target, energy prices remain elevated, and investors continue demanding higher compensation for holding longer-term government debt. That creates an uncomfortable environment for equities. Markets would welcome lower interest rates, but the Federal Reserve cannot simply ignore inflation. Meanwhile, long-term Treasury yields can remain elevated even without additional Fed rate increases if investors demand higher returns to compensate for inflation and fiscal uncertainty. This is why the bond market deserves as much attention as the Federal Reserve itself.

Jackson Hole Comes Into Focus

The next major macroeconomic event is the Federal Reserve's Jackson Hole Economic Policy Symposium. Investors will be looking closely for signals about how policymakers interpret the recent combination of softer employment, weaker consumer spending, persistent inflation and higher long-term borrowing costs. The challenge facing the Fed is becoming increasingly delicate.

If policymakers remain too restrictive while economic growth continues slowing, they risk weakening employment and consumer demand further. If they ease policy too quickly while inflation remains elevated, price pressures could reaccelerate.

Markets therefore want reassurance that policymakers still see a path toward controlling inflation without causing a significant economic downturn. Any indication that rates may remain restrictive for longer could keep upward pressure on Treasury yields and weigh further on growth-stock valuations. Conversely, a more accommodative message could provide relief to technology and other rate-sensitive areas of the market.

The aBP Portfolio

At Henriot Capital Investment Management, we continue focusing on businesses with durable competitive advantages, strong long-term growth opportunities and the financial flexibility to perform across changing market environments. Through the alpha Brief Portfolio (aBP), we do not base investment decisions solely on predicting the next move in Treasury yields or Federal Reserve policy. Instead, we focus on whether the underlying companies can continue growing revenue, generating cash flow and creating shareholder value.

This week's market action reinforces the importance of that approach. Higher Treasury yields can temporarily compress valuations even when company fundamentals remain strong. At the same time, periods of market rotation can create opportunities in sectors that receive less attention during technology-led rallies. The strength in Energy this week is a good example.

Rather than assuming one sector will permanently lead the market, we continue evaluating opportunities across industries while maintaining discipline around valuation and business fundamentals.

What Investors Should Watch Next

Next week brings two very different tests for the market. The first is NVIDIA earnings.

Strong results would provide further evidence that AI infrastructure demand remains intact and could help restore confidence across technology stocks. Investors should pay particular attention to data-center growth, margins and management's outlook for future demand. The second is Jackson Hole.

Federal Reserve commentary will help shape expectations for interest rates and could influence Treasury yields across the maturity curve. For equity investors, the direction of long-term yields may be just as important as the Fed's next policy decision. Investors should therefore watch both sides of the equation. NVIDIA will tell us something about earnings. Jackson Hole will tell us something about the discount rate investors apply to those earnings. Together, those two developments could determine whether technology resumes its leadership or whether the market rotation seen this week continues.

Bottom Line

The stock market's weakness this week was not driven by a sudden collapse in corporate fundamentals. Instead, rising Treasury yields reminded investors that valuation still matters.

The S&P 500 declined 1.4% for the week, while the Nasdaq fell 2.1% as long-term Treasury yields moved higher and investors reduced exposure to some of the market's most highly valued growth companies. Energy moved in the opposite direction, demonstrating that market leadership can shift quickly when interest rates and economic expectations change.

The next test is already approaching.

NVIDIA's earnings will show whether the extraordinary AI infrastructure cycle remains strong enough to support elevated expectations, while Jackson Hole could provide important clues about the future path of monetary policy and interest rates. For investors, the lesson from this week is straightforward: strong earnings matter, but so does the price investors are willing to pay for them. When bond yields rise, that price can change quickly. With technology valuations still elevated and Treasury yields approaching important levels, the battle between earnings growth and interest rates may become one of the market's defining themes heading into the final months of 2026.