Who will win? A bond storm sweeps through the US, Europe, and Japan, while global stock markets approach record highs

On Tuesday, US stock futures edged higher, with the S&P 500 index just one step away from reaching its first historic high since August, while Nasdaq 100 futures further consolidated their record levels. Meanwhile, previously sold-off US and European bonds rebounded, with the 10-year US Treasury yield retreating 3 basis points to 5.28% after hitting its highest since 2002 at 5.31%. Softer oil prices also eased some concerns about a resurgence in inflation.

European markets simultaneously warmed up. The Stoxx 600 index expanded its gains to 1%, hitting an intraday high and is set for its first three-day winning streak in nearly a month. French and Italian bonds, which had long underperformed, led the gains, while the euro stabilized after hitting a 17-month low.

Stocks “Weather” Bond Storm, Earnings Provide Key Support

Soaring bond yields are usually seen as a suppressor of equity valuations, but that logic is now being challenged.

Investors’ attention has shifted from interest rate risks to corporate earnings, macro data, and a capital spending wave centered on artificial intelligence. “What’s driving this year’s gains is earnings growth, not valuation expansion,” said Stephan Kemper of BNP Paribas Wealth Management Germany. “Earnings per share revisions remain strong, US companies’ guidance upgrades have exceeded the average, and we see room for this trend to persist.”

All “Magnificent Seven” tech stocks rose in early trading, providing direct momentum for the market. Mohit Kumar, Chief European Economist at Jefferies, noted that the breadth of current stock performance is narrow and mainly driven by the tech sector. “Strong earnings, ongoing capital expenditure, and ample system liquidity should continue to support shovel-and-pick related trades.”

AI Investment Boom Continues, Capital Flows Into Multiple Directions

The vibrant activity around AI-related deals has given the stock market rally another boost.

OpenAI is negotiating with several UAE sovereign wealth funds, seeking cornerstone investment support for its $30 billion financing round. Meanwhile, China’s DeepSeek and Moonshot AI are each advancing multi-billion dollar fundraising efforts.

On the hardware front, AMD CEO Lisa Su predicted that chip demand will remain “extremely high” in the coming years, despite ongoing challenges regarding AI safety in the industry. Alphabet, Google’s parent company, is reportedly set to sign a nuclear energy procurement agreement with Constellation Energy, reflecting the urgent demand by tech giants for stable power supply.

These concentrated capital flows confirm the market’s judgment that enthusiasm for AI will stay high even in a high interest rate environment.

The Dual Nature of High Yields: Threat or Signal?

Does the continued rise in bond yields signal rising risks, or is it evidence of a strong economy? There is disagreement in the market.

BlackRock analyst Vivek Paul believes this question deserves careful consideration: “If the driving force behind rising yields is stronger growth prospects or the AI boom, that’s not necessarily bad for the market.” This view represents the core logic of some current bulls: as long as rising yields are due to growth expectations rather than runaway inflation or fiscal stress, the simultaneous pressure on stocks and bonds may not last.

However, concerns have not disappeared. Bridgewater founder Ray Dalio warns that the US is nearing the limit of its debt cycle. The 10-year UK government bond yield is as high as 5.36%, similar to US Treasury yields; Germany’s 10-year yield has risen to 3.44%, and structural pressures in European bond markets also cannot be ignored.