Pearl Jam’s fifth album, Yield, was reportedly named by Eddie Vedder after reading Daniel Quinn’s philosophical novel Ishmael. The story follows a telepathic gorilla who challenges a human student to question many of society’s basic assumptions. We have not read it, but the broader takeaway is supposedly about yielding to something greater than oneself.
That idea also applies to the U.S. stock market lately. Earnings remain the fundamental driver of stock prices over time, but even a strong earnings outlook can eventually give way to something greater: the price of money.
Bond investors have been demanding more yield to compensate for uncertainty surrounding inflation, the path of Federal Reserve policy, and the government’s growing financing needs. Essentially, the additional yield is the price investors are charging for uncertainty.
Figure 1. 10-Year U.S. Treasury Yield (%)
Sources: Federal Reserve Board, Bloomberg L.P., and Potomac. Data as of July 27, 2026.
With both nominal and real yields moving higher, stocks have become increasingly sensitive to changes in interest rates. Historically, stocks have often risen when Treasury yields increased because higher yields reflected stronger economic growth. That has not been the case this year.
So far in 2026, the S&P 500 has generated a cumulative return of roughly 14.4% during weeks when the 10-year U.S. Treasury yield finished lower. During weeks when the 10-year yield finished higher, the S&P 500 lost a cumulative 6.5%.
Figure 2. Cumulative Weekly S&P 500 Returns by Direction of the 10-Year Yield (YTD)
Sources: Standard & Poor’s, U.S. Department of Treasury, Bloomberg L.P., and Potomac. Data as of July 24, 2026. Past performance is no guarantee of future results. It is not possible to invest directly in an index
That relationship becomes even more pronounced when the 10-year yield heads north of 4.50%. While rising yields are not always a problem for stocks, at sufficiently high levels, bonds become competition for investor capital and higher discount rates place pressure on equity valuations.
From 2023 through the present, the median weekly return of the S&P 500 during rising-yield weeks was positive when the 10-year Treasury yield remained below 4%. Once the yield moved above 4%, median weekly returns turned negative.
Figure 3. Weekly S&P 500 Returns When 10-Year Yield is Rising by Range (2023 to Now)
Sources: Standard & Poor’s, U.S. Department of Treasury, Bloomberg L.P., and Potomac. * The time range used for these returns was 2023 through July 24, 2026. Past performance is no guarantee of future results. It is not possible to invest directly in an index.
Hyperscalers Under Pressure
Turning from the broader market to technology shows a similar dynamic. The average credit default swap spread for the major hyperscalers, a market measure of perceived credit risk, has widened alongside the 10-year real yield. These companies remain highly profitable and their implied default risk remains low, but widening spreads suggest investors are demanding more compensation to hold their debt.
Figure 4. Hyperscalers’ Credit Default Swaps vs the 10-Year Treasury Real Yield
Sources: Bloomberg L.P., U.S. Department of Treasury, and Potomac. Data as of July 27, 2026. Note: The hyperscaler basket includes Amazon Inc., Alphabet Inc., Meta Platforms, Microsoft Corp., and Oracle Corp.
That makes sense given the scale of the artificial intelligence buildout. Hyperscalers are committing enormous amounts of capital to data centers, semiconductors, power infrastructure and cloud capacity. Higher real yields increase financing costs at the margin, raise the opportunity cost of capital and increase the return hurdle that future AI revenues must clear.
In other words, the market is no longer evaluating AI investment in a world of nearly free capital. The projects may still generate substantial long-term returns, but investors are applying a higher discount rate to cash flows that may not arrive for several years.
At the same time, the Silicon Data LLM Token Expenditure Index has rolled over from its recent high, while hyperscaler stocks have also weakened. Importantly, the index measures the price of inference tokens rather than total AI usage. Its decline therefore does not necessarily mean demand is contracting. Instead, it suggests that the average price paid per million inference tokens is falling, which could make monetization more difficult even as token volumes continue to grow.
Figure 5. Hyperscaler Stocks vs. Silicon Data LLM Token Expenditure Index
Sources: UBS, Bloomberg L.P., Silicon Data, and Potomac. Data as of July 27, 2026. Note 1: The hyperscaler stock basket includes Amazon Inc., Alphabet Inc., Meta Platforms, Microsoft Corp., and Oracle Corp. Note 2: The LLM Token Expenditure Index is the Silicon Data benchmark for large language model inference token pricing. It is published daily as a normalized blended rate expressed in USD per million tokens, drawn from observations across frontier API providers, open-weight inference platforms, brokered dedicated-instance markets, and self-hosted reference deployments.
That creates the possibility of a squeeze from both directions. The cost of capital is moving higher while unit pricing is moving lower. Neither pressure alone truly undermines the AI investment thesis, but they raise the hurdle for generating an attractive return on the enormous amount of capital being deployed. With hyperscaler valuations priced for near-perfect execution, it is not surprising to see a reset.
Giving Way to Yield
For now, higher real yields remain a headwind for stocks, particularly long-duration growth companies and the hyperscalers, whose valuations depend heavily on earnings expected well into the future. However, the ascent in real yields may not persist indefinitely.
Because much of this year’s rise in Treasury yields has come through higher real yields rather than wider breakeven inflation rates, the next move will likely depend heavily on the path of monetary policy.
The Fed’s July decision highlighted that tension. The Committee left rates unchanged, but three officials dissented in favor of a 25-basis-point increase, underscoring concerns that inflation risks remain elevated. However, the bond market reacted negatively to the news as investors questioned the Fed’s credibility and whether they would actually follow through on their plans to bring down inflation. Essentially, the bond market is saying that “talk is cheap.”
That said, if Chair Warsh can eventually convince bond investors that the Fed is prepared to act if inflation fails to recede, then real yields should eventually stabilize and relieve some of the downward pressure on stocks.
Still, relief from rising yields would not mean a return to the near-zero-rate environment that supported valuations during the previous decade. Even if rates stop moving higher, capital remains more expensive, and investors are likely to demand clearer evidence that record AI-related spending will translate into durable earnings.
The stock market has repeatedly shown that it can climb a wall of worry. But when yields move high enough, even the strongest parts of the market have to yield.
Weekly “Keeping it Strait” Highlights:
· Oil prices continued to whipsaw with the “on again” and “off again” rhetoric of the Iran conflict causing rapid shifts, but prices appear more contained than at the onset of the war.
· The NASDAQ 100 stock index officially entered a correction – down over 10% since June 2nd. Semiconductor stocks are down 20% over the same timeframe.
