Rising yields are a threat to the 'Magnificent Seven.' Here's why that could hurt U.S. consumers.

There are more than a few ways that rising bond yields might take a bite out of Americans' wallets.

Years of strong gains for the so-called Magnificent Seven and other technology names have quietly propped up Americans' spending and the U.S. economy in general.

Now rising bond yields are testing the stocks that made it all possible. It's another reason for investors to start taking Treasury yields seriously, given their potential to crimp equity valuations and drive up the cost of capital for the artificial-intelligence build-out.

All three major stock indexes pulled back in early September, while a sustained bond-market selloff pushed the 10-year Treasury rate BX:TMUBMUSD10Y to 4.80% on Wednesday - its highest level since January 2025. Technology stocks also were swept up, with the Roundhill Magnificent Seven exchange-traded fund MAGS off 0.5% this week, weighed down by the 4.4% decline in Amazon.com (AMZN) and the 2.6% drop in Google parent Alphabet (GOOGL) (GOOG), according to FactSet data.

The Magnificent Seven group of megacap tech stocks is up just 4.2% so far this year, versus 12% for the S&P 500 in the same period. But those seven stocks account for around 33% of the large-cap benchmark index, making them a linchpin of investor portfolios.

"Now that we're in September, the summer party for risk assets is over," said Nic Puckrin, a cross-asset analyst and the founder of Coin Bureau. "I expect investors to come back down to earth and start pricing the macroeconomic environment into equity valuations once again."

He added: "Prepare for a selloff, especially in long-duration equities like tech and AI."

The 10-year Treasury yield directly influences how much consumers and businesses pay to borrow, including on mortgages and auto loans. The 30-year mortgage rate was last pegged at 6.89%, according to Mortgage News Daily.

Higher yields also reduce the present value of future corporate earnings, making growth stocks - particularly AI-related names - less attractive relative to bonds. Together, downward pressure on shares of the world's largest tech companies could make U.S. households feel less financially secure, prompting some to cut back on discretionary spending such as travel, dining out and shopping, while increasing their savings to create a financial buffer.

"Information technology XX:SP500.45, discretionary names XX:SP500.25 and communication services XX:SP500.50 - stocks where their profit growth in the future is discounted back to present value - are seeing a harder time, since higher rates make the value of those future earnings less attractive," said Anthony Saglimbene, chief market strategist at Ameriprise Financial.

A 10-year Treasury yield moving toward 5%, though not his base case, would put some pressure on economic activity by increasing interest costs and potentially curbing consumer spending, Saglimbene told MarketWatch via phone. "At least in terms of GDP, higher rates would hurt to some degree some of the activity of the economy," he added.

Since consumer spending accounts for roughly two-thirds of U.S. economic activity, any broad pullback in household spending could slow growth and erode an important source of support for the economy. While consumers say they aren't thrilled about the economy, spending hasn't fallen off a cliff, either.

In Saglimbene's view, declines for technology stocks would need to "come in in a meaningful way" for a longer period to really start affecting consumer behavior and the economy. For now, it isn't big enough.

Treasury yields BX:TMUBMUSD30Y have been on the rise since at least July, so why are stocks only now treating it as a problem? For the better part of two months, a flurry of extraordinary earnings from chip makers and AI companies dominated market headlines, giving investors a reason to look past the selloff in bonds. But that cover is now gone and yields are back in focus, market analysts said.

Still, strong earnings growth thus far has limited the negative impact of rising yields on certain tech stocks, according to Jack Herr, senior investment analyst at GuideStone Funds.

"Initially, we thought the 4.5% level for the 10-year was going to be the point where yields started to affect stock valuations," he said via phone. "But interestingly enough, valuations haven't really expanded this year, and it's been that earnings growth that has just surprised so much to the upside."

The only problem is that Treasury yields could still have room to climb in September, said Puckrin at Coin Bureau.

"With stubborn inflation and the chances of a September [Federal Reserve interest-rate] hike on the rise again, the short end of the yield curve BX:TMUBMUSD02Y has few reasons to come down, and the U.S. doesn't have as many tricks up its sleeve as some might think when it comes to longer-dated bonds either," he said. "It can't simply inflate away its debt problem. Investors demand higher rates to hold its debt."

U.S. stocks were higher on Wednesday after a three-session drop. The S&P 500 SPX was up 0.4% Wednesday, while the Dow Jones Industrial Average DJIA was 0.5% higher and the Nasdaq composite COMP was up 0.4%, according to FactSet.

-Isabel Wang