As technology stocks and the artificial intelligence (AI) theme continue to drive U.S. equities to record highs, an increasing number of market participants are drawing comparisons to the dot-com bubble of the late 1990s. However, beyond the debate over stock valuations, more concerning signals may be emerging from the bond market. This week, U.S. long-term Treasury yields broke through a key level, sparking concerns about a potential tightening of financial conditions ahead. Analysts note that even if AI and tech stocks continue to propel the market higher, investors could face a more complex environment in the coming months.

The U.S. Treasury Department auctioned $25 billion in 30-year bonds on Wednesday, with a high yield of 5.046%, marking the first time the benchmark 30-year bond auction yield has exceeded 5% since 2007. Although the yield dipped slightly to 5.025% on Thursday, the market widely believes that 30-year Treasury yields staying above 5% may not be a short-term phenomenon. Factors such as the U.S. government's expanding borrowing needs, energy price increases driven by the Middle East conflict, and shifting risk appetites among global bond investors are all contributing to the sustained rise in long-term interest rates.

Simultaneously, the yield on the 10-year U.S. Treasury note climbed to 4.46% on Thursday, a cumulative increase of approximately 50 basis points since late February, nearing its highest level since June of last year. Short-term Treasury yields are also rising rapidly. Influenced by recent consumer and wholesale price data that exceeded expectations, the two-year Treasury yield has approached 4% this week, reaching its highest point in nearly a year.

Fundstrat economic strategist Hardia Singh stated that rising bond yields have not caught equity investors off guard. She pointed out, "When the Iran conflict erupted, market bears warned that rising oil prices could fuel inflation and make price pressures more entrenched, which is why long-term Treasury yields began rising from that point." LPL Financial chief technical strategist Adam Turnquist believes there is further room for long-term yields to increase. He stated that the 30-year yield breaking 5% suggests it could potentially rise further toward the previous cycle's high range of 5.15% to 5.28%. Turnquist warned that persistently rising long-term rates would become a significant headwind for the stock market, particularly pressuring growth sectors and industries reliant on low discount rates to support valuations.

Despite this, U.S. stocks remain robust. The market continued its advance even after digesting this week's stronger-than-expected Consumer Price Index and wholesale price data, pushing the S&P 500 to another record high, with year-to-date gains approaching 10%. However, several market observers question how long equities can ignore the bond market against a backdrop of persistent inflation and rising oil prices. Saxo Bank chief investment strategist Charu Chanana believes inflation may no longer be a short-cycle issue. She said, "Inflation is gradually evolving into a long-term investment environment." Beyond rising energy prices, she noted that projected AI-related capital expenditures could exceed $5 trillion by the end of the decade, coupled with trends of deglobalization, which could sustain inflationary pressures for years to come.

Rick Rieder, BlackRock's chief investment officer of global fixed income, stated that the Middle East situation is creating a classic supply shock. He noted, "When inflation stems from the supply side rather than demand, bond yields can remain elevated even as economic growth slows." Concurrently, the Federal Reserve's room for near-term interest rate cuts is diminishing. With inflation persistently above expectations, a robust labor market, and strong corporate earnings, even an incoming Fed Chair like Kevin Warsh would find it difficult to pivot quickly toward an easing policy. Mona Mahajan, investment strategy director at Edward Jones, said, "Inflation remains elevated, jobs and economic growth continue to exceed expectations, and corporate earnings are strong. The rationale for rate cuts is becoming increasingly scarce."

Notably, despite rising risks in the bond market, technology stocks continue to lead gains. Since its low in late March, the Nasdaq Composite has rebounded nearly 30%, the Dow Jones Industrial Average has once again surpassed the 50,000-point milestone, and the S&P 500 has climbed above 7,500 points. However, a recent Bank of America fund flows report warned that the 5% yield on the 30-year Treasury is a critical threshold for market focus. Historical experience shows that asset bubbles often reach an inflection point during periods of rapidly rising bond yields. If long-term yields move to fresh highs, they could exert greater pressure on equity valuations and overall market risk appetite.