The S&P 500 rebounded hard on Friday, and despite a surge in Treasury yields over the past two months, the index sits just 0.4% from the August all-time highs. And that rightly could lead to the question: "Are Higher Treasury Yields Really a Negative for the Markets?"
Put simply, the answer is "yes": surging yields have been a negative for the market, but SPY/the S&P 500 has benefited from strength in AI and energy, which is masking the pain across the stock market. Since the peak in SPY on Aug. 12:
• The S&P 500 is down 0.4%, but RSP (the equal-weight S&P 500 ETF) is down 5.1%.
• The Dow Industrials and Russell 2000 have declined 4.8% and 7.05%, respectively.
• Eight of the 11 sectors in the S&P 500 are negative since then.
• Seven of those eight are down more than 4.5%.
• Bonds, reflected by the ETF AGG, are down 3.3%.
The point is clear: Strength in AI names (mainly due to Muse excitement) and strength in energy (due to higher oil/refined product prices) are boosting SPY and essentially "masking" the modest pain across the rest of the markets.
Put plainly, high yields are a headwind on the markets. Looking forward, it's reasonable to expect that this 5% spread in SPY vs. RSP cannot last. Either SPY is going to begin to decline and "catch up" to the negative RSP (there will be a lull in the constant flow of "next biggest thing" AI headlines), or, positively, oil will steady, yields will fall, the Fed won't hike rates, and stocks can live, and RSP can "catch up" to SPY. And in that case, the value will be in the "rest of the market" vs. tech.
Bottom line, SPY has been resilient, but that's almost entirely due to META/Muse-inspired AI enthusiasm and strength in the energy sector. Every other part of the market (including bonds) is facing headwinds, and the reality is the longer yields stay higher, the more that the pain will spread (there will not be a constant enough drip of "next big thing" AI headlines to offset Treasury yields that now live in the mid-5.0% range).
So, higher yields are a headwind on markets. That headwind is getting stronger, and the longer it lasts, the more painful it will become. The sooner the 10-year yield drops back below 5.00%, the better.
A Goldilocks jobs report helped to offset other hot economic data last week, and the net result was a reduction in expectations for Fed rate hikes, which helped stocks rally late last week. All in all, we wait and see whether oil and gas prices continue to fall and, if so, whether interest rates will begin to fall as well.
Source: Sevens Report 10/5/26