For much of 2026, the equity bull case rested on a comfortable combination of resilient US growth, powerful artificial intelligence investment and an eventual easing in inflation that would allow interest rates to drift lower. That story has not disappeared, but the bond market is starting to question one of its most important assumptions. Long-term borrowing costs are rising again, and this time the move is being driven by more than a temporary inflation scare.

The warning from Treasuries

The clearest signal is coming from the long end of the US Treasury curve. On 24 September, the 30-year yield climbed to its highest level in more than two decades, while the 10-year yield had already reached its highest since 2007 a day earlier. Today, the 30-year yield was around 5.53%, despite some stabilisation in shorter maturities.

Several forces are converging. Oil has surged as the US-Iran confrontation has disrupted energy markets, reviving fears that inflation could remain sticky. UKOil jumped above $108 a barrel today as negotiations stalled. At the same time, US economic activity has remained stronger than many investors expected. S&P Global's September flash composite PMI rose to 58.4, its strongest reading since July 2021, suggesting that demand remains robust.

The inflation data are not giving bond investors much comfort either. US consumer prices rose 0.4% in August and 3.4% from a year earlier, while producer prices increased 5.4% year on year. The labour market has also remained firm, with non-farm payrolls rising by 162,000 in August and unemployment holding at 4.1%.

That combination helps explain why the Federal Reserve raised its policy rate by 25 basis points on 16 September to 3.75% to 4.00%, its first increase in three years. More importantly, the Fed's latest projections show a median federal funds rate of 4.1% at year-end, compared with 3.8% in June. The median projection also keeps rates at 4.1% through 2027.

Why this matters for equities

None of this automatically kills the bull market. Corporate earnings remain resilient, AI-related capital spending continues to support growth, and the SPX500 remains well above its levels at the start of the year. The NAS100 even reached a record intraday high on 23 September as enthusiasm around AI and technology shares remained strong.

But the valuation mathematics are becoming less forgiving. Higher Treasury yields increase the discount rate applied to future corporate cash flows, reducing the present value of long-duration growth assets. They also create a more credible alternative to equities. When investors can earn 5% or more in high-quality government bonds, paying elevated multiples for uncertain future earnings becomes harder to justify.

There is also a fiscal dimension. US federal debt has moved above $40 trillion, while higher yields are increasing the government's interest burden. That matters because persistent deficits require heavy Treasury issuance, potentially keeping upward pressure on long-term yields even if the Fed eventually stops tightening. In other words, the market may be moving from worrying about the next Fed decision to worrying about the price required to absorb an enormous supply of government debt.

The bull case therefore needs to evolve. It can no longer rely on falling yields doing part of the work for equities. Instead, earnings growth must increasingly carry the burden. If corporate profits continue to surprise positively, productivity improves and inflation eventually moderates, stocks can still advance despite expensive money.

There is another subtle change. Earlier in the rally, stronger economic data often helped equities because it supported earnings while inflation appeared to be cooling. Now good news can push bond yields higher because investors fear it will keep the Fed restrictive. That changes the market's reaction function. Growth remains welcome, but only if it arrives without another inflation impulse. The oil shock makes that balance harder, particularly if energy costs begin feeding into transport, wages and services prices.

The risk is that investors are underestimating how long rates may remain high. The Fed now projects 2026 GDP growth of 2.3%, unemployment of 4.1% and PCE inflation of 3.7%. That is not a recessionary picture. It is an economy strong enough to keep inflation pressure alive and policy restrictive.

The message from bonds is therefore not that the bull market is over. It is that the hurdle rate has risen. Equity investors are being asked to justify today's valuations against a world in which inflation is less obedient, government borrowing is larger and risk-free yields are materially higher. That does not destroy the bull case, but it rewrites it

Sources and References

• reuters.com
• reuters.com
• federalreserve.com
• reuters.com
• reuters.com
• reuters.com