The 10-year U.S. Treasury yield is approaching 5.4%, and the AI halo cannot hide the "hollowed-out" concerns of the S&P 500.

The U.S. stock market appears calm on the surface, but undercurrents are stirring beneath. The 10-year U.S. Treasury yield approached 5.4% this week, hitting its highest level since 2002, while Brent crude oil hovered above $100 per barrel. Financial markets are undergoing a broad retreat obscured by the halo of tech giants. The S&P 500 hit a record high this week, but behind this milestone lies an extremely fragile market foundationonly about 30% of constituent stocks are trading above their 50-day moving averages, the lowest market participation rate on any record-setting day since Bloomberg began collecting data in 1990. Meanwhile, the Russell 2000 small-cap index fell for a fifth consecutive week, down about 8.5% from its peak and approaching correction territory. The rate shock is spreading to broader asset classes. Junk bond ETFs have fallen to near their lowest levels since the selloff triggered by this spring's tariff war, U.S. high-yield corporate bond spreads continue to widen, and yields on bonds issued by the weakest borrowers have reached as high as about 15%. NYSE Group President Lynn Martin directly attributed the recent postponement of several high-profile IPOs to rising interest rates. The rate shock is spreading to broader asset classes. Junk bond ETFs have fallen to near their lowest levels since the selloff triggered by this spring's tariff war, U.S. high-yield corporate bond spreads continue to widen, and yields on bonds issued by the weakest borrowers have reached as high as about 15%. NYSE Group President Lynn Martin directly attributed the recent postponement of several high-profile IPOs to rising interest rates. Under New Index Highs, Market Breadth Is the Worst on Record The S&P 500 touched a record high this week, but the quality of this milestone is facing serious scrutiny. According to Bloomberg data, at the time the S&P 500 set a record high, only about 30% of its constituents were trading above their 50-day moving averages. The 50-day moving average is an important reference indicator for measuring recent market breadth. The lower this figure, the more the index's gains depend on a handful of heavyweight stocks, and the weaker overall market participation becomes. Small-caps are in an even more severe situation. Among the rate-sensitive Russell 2000 constituents, only 27% are trading above their 50-day moving averages. The index has fallen for five consecutive weeks, down about 8.5% from its peak, and is approaching the threshold typically defined as a 10% technical correction. Real estate stocks have also experienced sustained declines. James St. Aubin, Chief Investment Officer at Ocean Park Asset Management, said: "The market-cap-weighted S&P 500 is masking a lot of damage happening beneath the surface. The bond market has effectively tightened financial conditions without the Fed having to act. The risk is that the initial energy shock could eventually morph into an earnings problem, and the stock market has not fully priced in that possibility." Rate Shock Spreads Globally, Borrowing Costs Climb Across the Board The 10-year U.S. Treasury yield approached 5.4% on Wednesday, the highest level since 2002, and the rate shock has spread beyond U.S. borders globally. Meanwhile, Brent crude oil prices have continued to hover above $100 per barrel, exacerbating concerns about persistently high inflation. U.K. borrowing costs have risen to a 19-year high, and pressure on French government debt has also increased. In credit markets, the stress signals are more direct. Yields on bonds issued by the weakest borrowers have reached as high as about 15%, an extremely heavy threshold for companies needing to refinance. U.S. high-yield corporate bond spreads have continued to widen in recent days, and junk bond ETFs have fallen to near their lowest levels since the market selloff triggered by this spring's tariff war. St. Aubin called sub-investment-grade credit spreads the "real panic barometer," and noted that the continued widening of spreads since mid-September is unsettling. He said his firm's internal models have issued downtrend warnings for multiple rate-sensitive investments, prompting the team to cut exposure to credit-sensitive assets including high-yield bonds. Extreme Scenario Analysis: S&P 500 Could Fall More Than 20% Next Year Strategists at French bank Industrial Bank have provided a quantitative assessment of market direction under extreme scenarios, and the conclusion is not optimistic. Societe Generale strategists Manish Kabra, Charles de Boissezon and Kawtar Mamouni noted in a recent research report that if the 10-year U.S. Treasury yield rises to 6%, Brent crude rises to $150 per barrel, and tech giants' cash flows remain under pressure, the S&P 500 could fall more than 20% next year. Conversely, if yields fall back to 4%, oil prices retreat to $80 per barrel, and large technology companies' fundamentals improve, the market still has room for further gains. Kabra said: "A 5% yield creates valuation headwinds, but a 6% yield would trigger credit events, and that is more likely to occur outside the private sector, where the most highly leveraged balance sheets are. All the problems right now are concentrated on sovereign fiscal stability and debt sustainability." The AI Trade Is Not Monolithic, and Capital Is Already Quietly Leaving It is worth noting that Thursday's sharp decline in chip stocks shows that even the AI-themed trade is not invulnerable. The S&P 500 and Nasdaq 100 rose overall this week, but Thursday's collective slump in chip stocks showed that market confidence in AI demand is wavering. Whether the major indexes can continue to withstand pressure depends to a large extent on the subsequent direction of oil prices and the bond market. Some investors have already chosen to exit proactively. Fund manager Jeff Muhlenkamp, who manages $270 million and has outperformed the S&P 500 this year, said he has significantly increased his energy holdings and has nearly emptied all AI-related positions. "I'm happy to leave while the party is still going," he said of the AI boom. "Financing is still available right now. Once that condition runs out, the game is over." Currently, the rate shock is prompting investors to readjust their portfolios rather than triggering a full-scale selloff in risk assets. Investors are stripping out positions sensitive to bond yield volatility and high financing costs, with everything from speculative credit to currency carry trades contracting. But as rate pressure continues to build, this structural divergence beneath a calm surface is testing the market's limits of resilience. This article is reprinted from Wall Street CN, author: Dong Jing; GMTEight editor: Zheng Yuyang.