Textbook theory holds that when real yields reach cyclical highs, economic growth is suppressed and stock valuations come under pressure. Senior technical strategist Rick Bensignor believes technology stocks have peaked relative to the broader market, making healthcare and financials more attractive for portfolio allocation. The 1968 classic The Money Game reveals that Wall Street's concerns about so-called circular financing are nothing new.

The US economy is in the heat of summer, while the thermostat hangs in the hottest room of the house — direct sunlight, with the oven still set to broil. That thermostat is the bond market. Facing a flood of debt financing demand from both government and corporations, the bond market has pushed borrowing costs to multi-year highs as a way to offset the financing boom. The "kitchen" is the AI buildout race: the industry is eager to convert roughly $2 trillion in investments into massive computing power reserves by the end of next year.

Rising bond yields have not significantly curbed corporate financing or investment expansion, but they could cause other parts of the economy to "overcool," such as real estate and domestic consumption. It is against this backdrop that US Treasury Secretary Scott Bessent stepped in last week, expanding an existing buyback program to repurchase smaller amounts of less-liquid Treasuries in the open market, aiming to push down long-term yields. The move has sparked intense debate among market participants and commentators. Some argue the Treasury Secretary's actions contradict his earlier criticism of predecessor's intervention in market rates; others say the buyback is too small to matter; and some agree with both views.

Treasury yields dipped for just one day before rebounding, while the US dollar weakened sharply and gold prices continued to climb, intensifying the criticism. This combination of market moves can be read as a vote of no confidence in financial policy management. The bond selloff also inevitably heightens worries that the long-warned fiscal risk tipping point may be becoming reality. The challenge of financing the US structural deficit is like an autoimmune disease: once hit by negative market shocks, such as overheated capital spending or inflation feedback from war, anxiety flares up, then often subsides again.

But many may have missed this: the 10-year Treasury yield rose just 4 basis points last week to 4.74%. Over the past three years, yields have touched this level several times, though never for long. Meanwhile, investment-grade corporate bond yields remain below their peaks from a few years ago, because credit spreads over Treasuries are still extremely tight. In absolute yield terms, there is no broad pressure on large corporations yet, nor is there a strong downward pull dragging on stocks.

With US nominal GDP growth (real growth plus inflation) near 5%-6%, how low should the 10-year Treasury yield reasonably fall? Compared to historical ranges, the yield curve's steepness has not reached extremes either. So why is the market overreacting so dramatically?

So far, the rate increase has been orderly, which is why stocks have remained relatively resilient. Although equity investors are highly vigilant, there is no clear threshold for yields that would immediately break the stock market. Textbooks point out that when real yields reach cyclical highs — the 30-year real yield, calculated as nominal yield minus market inflation expectations, has now broken above 3% — it should restrain economic growth and stock valuations. But such effects tend to be gradual and subtle, and can be offset in the short term by strong corporate growth.

It is also worth noting that the S&P 500 itself is in this overheated AI "kitchen." Nearly one-third of the index's recent earnings growth comes directly from AI infrastructure companies. The index now looks more like a barometer for capital goods and B2B businesses than a gauge of US consumer spending. Discretionary consumer stocks account for 9.2% of the S&P 500; but excluding Amazon and Tesla, which represent AI technology, that weight drops below 4%. So even with July housing starts down 12.4% month-over-month and Walmart reporting its weakest same-store sales growth since 2020, the broader market remains just a few percentage points from record highs.

This is not to say the overall economy is in trouble — far from it. Consumer growth is oscillating in a stable range, unemployment is low, and household debt burdens are manageable. However, wage growth continues to weaken, inflation remains elevated, and the one-time boost from tax refunds has faded. The real driver of the economy is capital spending supported by strong corporate profits. With capital strong and worker income weak, rising rates translate more into purchasing power erosion in the public eye rather than a signal of household sector strength.

Will bonds see a contrarian rebound? For investors, higher real Treasury yields raise borrowing costs for issuers on one hand, but on the other hand they are compensation for bondholders. When conventional wisdom no longer favors bonds as a hedge against stocks, are bonds building up allocation value? Barry Knapp of Ironsides Macro Research says that despite weak inflation and employment data, and mixed consumer numbers, Treasury yields are still climbing. "We have been long-term bearish on bonds, and we don't see the Treasury Secretary's move as a major positive catalyst, but we still see room for a contrarian rebound in long-term Treasuries."

With bond topics dominating market discussion, the S&P 500 fell 1.4% last week. Stock investors are watching how the bond market allocates capital between the public and private sectors through higher yields. The biggest concern for equity investors — the massive, cost-no-object capital spending in AI — is precisely the source pushing up rates and potentially suppressing growth elsewhere. Semiconductor stocks fell more than 5%, with rebounds stalling at key technical resistance levels, and the market's inherent rotation rhythm has also loosened. Bank stocks dropped 4% amid Treasury market turmoil; industrial stocks with high valuations and indirect AI exposure fell more than 3%. The S&P 500 pulled back to the upper edge of the multi-month trading range from May to July before bouncing slightly.

Senior macro and technical strategist Rick Bensignor (now at Bensignor Investment Strategies) reads the tape: technology stocks have peaked relative to the broader market, and healthcare and financials offer better entry points. He sees multiple technical warning signs: "The S&P 500 has had 10 down days in the last 13 sessions, meaning institutional money has indeed been selling since the August 4 breakout. If Nvidia's earnings on Wednesday fail to bring real buying, I would raise the risk alert significantly."

On market sentiment indicators, John Kolovos's proprietary gauge, which combines multiple data points and reflects both investor commentary and actual trading behavior, shows: "Sentiment has heated up, which partly explains this week's stock pullback. Implied volatility remains low, while the percentage of survey respondents bullish is rising. Although I am broadly bullish on the market overall, I still recommend tactically buying VIX call spreads as insurance."

The phenomenon of hardware giants financing customer technology purchases — so-called circular financing — has precedent in the classic book. In it, a seasoned market veteran asks a young investor how he achieved a hundredfold return in six months: "By leasing computers against stocks, sir!" the young man replies, like a student answering a senior's question. "The demand for computers is almost unlimited," says Billy the Kid, "Leasing is the only viable sales method, and computer companies don't have enough capital themselves. So profits will double this year, double again next year, and double again the year after. The industry is just getting started; the rally is just beginning."

The Wall Street Journal published an obituary for Victor Niederhoffer, the flamboyant and notorious trader who passed away earlier this month. When I was writing a column for Barron's, he would occasionally email me, often with condescending, courteous praise suggesting my articles were "finally getting close to the point." His harshest criticism was reserved for my then-colleague Alan Abelson, Barron's senior editor and former editor, whose florid, erudite style was persistently bearish. Vic compared Alan to "a priest who doesn't believe in God — a financial writer who hates the stock market." Vic himself did not hate the market, but the market was not always kind to him: he made and lost fortunes twice, and shorted volatility ahead of major market declines, eventually blowing up.

In recent quarters, earnings growth has outpaced stock price gains, and many bulls have cheered what they call healthy valuation compression. Looking at static price-to-earnings ratios, this is true: over the past 10 months, the S&P 500's P/E has fallen from 23x to 20x. But it is important to remember that top earnings companies are frantically reinvesting to fuel the AI buildout. Today, free cash flow has become as scarce as memory chips and gas turbines. Based on expected free cash flow, the S&P 500's price-to-free-cash-flow ratio is near 30x, at multi-decade highs. Put another way: the stock market's free cash flow yield is 3.4%, while the 10-year Treasury yield has reached 4.74%.

Of course, corporate cash burn is largely a matter of choice. The actions of large tech platforms show they see no viable exit from the superintelligence arms race; at minimum, they need to stockpile enough data center computing power to rent out to those trying to build a new collective intelligence from silicon.