This relentless bull market is about to face its biggest test yet

By Joseph Adinolfi and Joy Wiltermuth

A selloff in the global bond market is pushing the yield on the 10-year Treasury note dangerously close to 5%

The bull market in stocks is running up against surging bond yields.

This rip-roaring AI-powered bull market has already overcome a handful of potentially existential challenges, from the 2023 collapse of Silicon Valley Bank to last year's tariff tantrum.

But a punishing selloff in the global bond market - driven by high energy prices, as the ongoing closure of the Strait of Hormuz has reignited inflation fears - could represent the biggest challenge yet for the bull market in stocks, several Wall Street sources told MarketWatch. The bull market reached its third birthday back in October.

"If the 10-year Treasury reached 5%, it would be an acknowledgement that inflation is now a real problem," said Ben Sullivan, chief investment officer at AE Wealth Management. "You can certainly see the market get cranky about that."

Over the past few days, yields in the U.S. and in developed markets around the world have been pushing to their highest levels in decades. Long-term yields in Japan BX:TMBMKJP-10Y recently revisited levels from the 1990s, helping to revive worries that higher rates at home could inspire Japanese savers and investors to pull their money from foreign markets.

On Tuesday, the yield on the 30-year Treasury bond BX:TMUBMUSD30Y reached 5.18%, its highest level since July 2007, according to Dow Jones Market Data. Even more importantly, the yield on the 10-year Treasury note, now around 4.67%, looks to be on the verge of a breakout, as MarketWatch reported earlier.

On Tuesday, the yield on the 10-year BX:TMUBMUSD10Y touched its highest level since January 2025 based on its 3 p.m. Eastern level, according to Dow Jones Market Data. For context, the yield on the 10-year hasn't topped 5% since the summer of 2007.

Technical strategists see the 10-year yield revisiting 5% in the not-too-distant future, with a break above that level a real possibility.

According to Katie Stockton, founder and managing partner at Fairlead Strategies, short- and medium-term momentum indicators monitored by Stockton and her colleagues suggest that the 10-year yield could soon retest 4.75%, a level consistent with its 2025 high. After moving above that level, the next stop could be 5.25%.

A model from BCA Research that incorporates technical inputs as well as economic data like inflation rates also suggested that bonds could continue to struggle in the months ahead, pushing yields up.

"I think it's a really good question," said George Schultze, founder and CEO of Schultze Asset Management, when asked about the threat that an increasingly unsteady bond market might pose to stocks. "I don't think many people have fully factored that in."

Need for speed

On Tuesday, the S&P 500 SPX tallied a third straight day in the red - its longest losing streak since late March, according to FactSet. Rising Treasury yields were widely blamed for contributing to the market's woes.

"It's pretty clear the 10-year yield north of 4.5% is suggesting a trouble zone for equities and riskier assets," said Jason Vaillancourt, chief portfolio strategist at Columbia Threadneedle Investments.

As yields have pushed higher, stocks and bond prices have increasingly started to move in lockstep. Analysts at Goldman Sachs pointed out that the rolling three-month correlation between global stocks and the 10-year U.S. Treasury yield has taken a sharp turn into negative territory, in commentary shared with MarketWatch on Tuesday. Bond yields and bond prices move in opposite directions.

To be sure, the absolute level of bond yields isn't always the most important thing for equity investors. The quicker that yields advance, the more pain stocks will feel. At least, that is how things have worked in the past, as Goldman showed in the chart below.

"5% could mark an important psychological level for investors, but I do think the speed of the move is what matters. We learned that in the fall of 2023 when yields were rising sharply and stocks sold off," said Kevin Gordon, head of macro research and strategy at Schwab Center for Financial Research.

Evercore founder Roger Altman warned that, based on his understanding, the global energy market (BRN00) (CL00) was nearing a "tipping point," during an interview on CNBC on Monday.

Discount rates and cash flows

Higher yields typically weigh on stocks for two key reasons. One, as Schultze explained, is that higher yields mean equity analysts need to raise the discount rates they use in their valuation models.

"For companies with these really high-growth business models, your valuation discount will increase more substantially," Schultze said.

But perhaps even more importantly, over time, higher yields could hurt stocks where it hurts: corporate profits. Higher yields act as a brake on economic growth, said Peter Berezin, chief global strategist at BCA Research. Since economic growth and the pace of corporate cash flows are related, weaker growth could mean less money flowing into corporate coffers.

Higher yields could also put more pressure on the housing market, dampening consumers' propensity to spend, Berezin said. Lately, economists have credited the wealth effect with helping to keep the U.S. economy and markets resilient in the face of myriad shocks, from the latest spike in oil prices to last year's tariff drama.

And as companies increasingly turn to external financing to pay for the ongoing AI buildout, higher yields could hamper some companies' ability to finance new data centers.

To be sure, not everybody expects higher yields will create serious problems for stocks. Recently, equity investors have been laser-focused on the rapid growth in corporate profits. As long as profits aren't affected, there could be room for higher yields and higher stocks to coexist, said Eric Winograd, chief U.S. economist at AllianceBernstein.

"Higher yields will increase volatility in the stock market, but I wouldn't say that means the stock market has to go down," Winograd told MarketWatch.

-Joseph Adinolfi -Joy Wiltermuth

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05-20-26 0700ET