AI Stocks Are Defying the Bond Market

KEY POINTS

• The 10-year Treasury yield climbed to roughly 5.20%, hitting a fresh 19-year high.

• Microsoft rallied 3.3% after unveiling new AI capabilities for Copilot, including coding and always-on agent tools.

• Akamai jumped 6% after striking an $11.6 billion cloud-services agreement with Anthropic.

• Stocks still climbed, with the S&P 500 up about 0.5%, the Nasdaq up 0.5%, and the Dow gaining nearly 0.8% Friday afternoon.

MARKET SNAPSHOT

The quick read: Stocks are green, but the pressure underneath the market is building.

The S&P 500, Nasdaq and Dow are all higher, powered in part by another burst of enthusiasm around AI.

But two important numbers are moving in the wrong direction for investors: Treasury yields and oil.

The 10-year Treasury yield climbed to roughly 5.20%, while Brent crude remained above $100 per barrel.

So Friday's market is sending two very different signals:

🟢 Stocks: Risk appetite is alive.

🔴 Bonds: Higher yields are tightening financial conditions.

🔴 Oil: Elevated energy prices remain an inflation threat.

And right now, AI enthusiasm is winning the tug-of-war.

The Economy Just Refused to Slow Down

Wall Street received a surprisingly strong economic report Wednesday.

S&P Global's preliminary U.S. Composite PMI—which measures activity across manufacturing and services—jumped to 58.4 in September, up from 56.0 in August.

That's the highest reading since July 2021.

Anything above 50 signals expansion.

So 58.4 isn't exactly an economy limping toward recession.

New orders surged, manufacturing activity strengthened, and factory hiring accelerated at its fastest pace in years.

Normally, investors would celebrate.

Today they sold stocks.

Why?

Because Wall Street isn't particularly worried about a recession right now.

It's worried about inflation.

And an economy that refuses to cool could make the Federal Reserve's job considerably harder.

5% Treasury Yields Are Back

The bond market reacted almost immediately.

The benchmark 10-year Treasury yield jumped roughly 9 basis points to around 5.05%.

That's its highest level since 2007.

And this time, 5% isn't merely a psychological milestone.

It's becoming a serious competitor to stocks.

Think about the choice investors face.

When Treasury yields were 1% or 2%, investors looking for meaningful returns had relatively few alternatives to equities.

At 5%, that calculation changes.

Investors can earn substantially more from government bonds without accepting the same risks associated with stocks.

And for expensive technology companies, higher yields create another problem.

Much of their valuation is based on profits expected far into the future.

The higher interest rates go, the less those future profits are worth in today's dollars.

That's one reason the Nasdaq fell more than 1% Wednesday, underperforming the broader market.

Another Fed Hike?

Here's where today's economic report becomes especially important.

Before the data arrived, futures markets were pricing roughly a 53% probability of another Federal Reserve rate increase in October.

Afterward?

About 73%.

That's a dramatic repricing in a matter of hours.

The Federal Reserve already raised its benchmark rate last week as policymakers attempt to get stubborn inflation under control.

And Fed Governor Michael Barr reinforced the message Wednesday, saying policymakers will likely need additional rate increases.

Investors spent much of the past few years waiting for rate cuts.

Now they're debating how many more hikes might be coming.

That's a very different market.

WHAT'S MOVING

Meta: +2.3%

Meta bucked the broader technology selloff as enthusiasm surrounding its new Muse AI assistant continued. The stock has now gained roughly 13% this week as investors consider whether Muse could become another major business for the company.

Alphabet: -3.5%

Google's parent was among Wednesday's biggest megacap drags as investors considered how increasingly capable AI agents could disrupt traditional internet businesses.

Amazon: -2.4%

Amazon also fell. The company has blocked Meta's Muse from its shopping platform as investors consider how autonomous AI agents could reshape online commerce.

Expedia & Airbnb: more than -6%

Travel stocks were hit particularly hard as investors contemplated a future where AI agents could increasingly handle travel searches and bookings directly.

Nvidia: -1.6%

Nvidia slipped as the broader semiconductor index fell about 1.4%, giving back some of the enormous AI-driven gains seen earlier this week.

Cracker Barrel: +6.5%

One decidedly non-AI winner: Cracker Barrel rallied after beating Wall Street's fourth-quarter sales expectations.

AI Is Starting to Create Winners—and Losers

There's another story developing underneath today's market.

For most of the AI boom, the investing thesis was fairly simple:

AI means more chips.

More data centers.

More cloud computing.

Buy the companies supplying them.

But Meta's Muse is beginning to demonstrate the next stage.

What happens when AI starts disrupting the businesses sitting on top of that infrastructure?

Muse can perform tasks on a user's behalf, including sending emails, booking travel and making transactions.

The assistant has received a strong early reception, helping Meta shares surge more than 20% since its September 8 launch.

That's great news for Meta.

Potentially less great for companies whose businesses depend on consumers visiting their websites.

Travel companies are an obvious example.

If an AI assistant can compare flights, choose a hotel and complete a booking without the user manually browsing multiple websites, the traditional online travel model suddenly looks a little less bulletproof.

Wednesday's selloff in Expedia and Airbnb suggests investors are beginning to take that possibility seriously.

The AI trade may therefore be entering a new phase.

Instead of simply asking:

"Who benefits from AI?"

Wall Street is increasingly asking:

"Who gets disrupted by it?"

OIL ISN'T HELPING

Bond yields weren't Wall Street's only problem.

Oil climbed again Wednesday as investors watched developments surrounding Iran and the Middle East conflict.

U.S. crude rose to roughly $92 per barrel, while Brent climbed above $101.

Iranian President Masoud Pezeshkian said Wednesday that Iran would not surrender to U.S. pressure, although he also expressed support for diplomacy.

That uncertainty matters enormously for markets.

Higher oil can feed directly into inflation.

Higher inflation can keep the Fed tightening.

And higher rates can pressure stock valuations.

It's a chain reaction Wall Street has become very familiar with this month.

WHAT INVESTORS SHOULD WATCH

The 10-year Treasury: At roughly 5.05%, yields are now at levels not seen since before the financial crisis. If they keep climbing, expensive growth stocks could face additional pressure.

The Fed: October suddenly matters much more. Markets have rapidly increased their expectations for another rate increase.

Oil: A sustained move back above $100 Brent could complicate the inflation outlook just as economic demand is proving stronger than expected.

AI disruption: Watch companies outside the semiconductor industry. The next stage of the AI trade may increasingly be about identifying which existing businesses lose customers or pricing power to AI agents.

Trump–Xi talks: President Donald Trump is hosting Chinese President Xi Jinping in Washington this week, with trade, technology and AI regulation among the issues on the agenda.

AROUND THE MARKET

The Nasdaq's record streak ended. The tech-heavy index had recorded record-high closes during the previous two sessions before Wednesday's decline.

Meta is still ripping. Even with tech broadly lower, Meta gained as investors continued reacting to the early success of Muse.

The dollar strengthened. Expectations for higher U.S. interest rates pushed the dollar to multiweek highs against several major currencies.

Gold fell. Spot gold dropped roughly 1.5% as Treasury yields and the dollar climbed.

Wall Street isn't cheap—but it's cheaper. The S&P 500 is trading just below 19 times expected earnings, its lowest valuation since 2023.

THE BOTTOM LINE

Investors spent years hoping for an economy strong enough to avoid recession.

They got one.

Now Wall Street has a different problem.

The economy may be too strong for inflation to disappear.

Wednesday's surprisingly hot business data sent the 10-year Treasury yield to its highest level since 2007 and dramatically increased expectations for another Fed hike.

That's the strange market investors find themselves in:

Strong growth can mean higher rates.

Higher rates can mean lower valuations.

And suddenly, good economic news isn't necessarily good news for stocks.