S&P 500’s $18 trillion rally faces pressure from 5% yield fears

The S&P 500, America’s crown jewel of the stock market, exploded in value over the past two years, climbing more than 50% and racking up $18 trillion in gains.

It’s been an unstoppable force, fueled by AI mania and promises of tax cuts from President Donald Trump. But Wall Street is suddenly sweating as Treasury yields surge past 5%.

Friday’s 1.5% plunge in the S&P 500 was a brutal wake-up call. The index erased all its 2025 gains and nearly wiped out the November rally that followed Trump’s election win. Wall Street is now staring at an uncomfortable truth: the bond market has declared war on them.

Treasury yields hit 5% and spook the stock market

Higher yields mean better returns for investors in bonds, so why bother risking money in stocks? Right now, the S&P 500’s earnings yield is sitting 1% below what you’d get from a 10-year Treasury note. That’s a 2002-level problem, and it’s making equities look like a lousy deal.

The trouble doesn’t stop there. Rising yields hit companies where it hurts. Borrowing costs go up, squeezing profits and making capital-intensive projects less appealing. Investors have started noticing, and the pain is showing up on their screens.

The Fed’s role in this chaos isn’t exactly comforting. They’ve cut the fed funds rate by 100 basis points since September, but yields have shot up by the same margin during that time.

This divergence is global, with inflation staying stubborn, central banks doubling down on hawkish policies, and government debt ballooning across the board. For traders hoping the Fed would save the day, think again.

If the S&P 500 has a safety net, it’s Big Tech. The so-called Magnificent Seven—Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla—are still raking in cash and posting solid earnings. Together, these giants make up more than 30% of the index, giving them outsized influence over market performance.

AI is the golden goose here. Investors are banking on these companies to dominate the AI revolution, which explains why their stocks are still doing well despite the broader market jitters. But even tech isn’t invincible.

Gold breaks the rules

2024 was a bizarre year. Gold and the S&P 500, which are usually enemies on the trading floor, suddenly became best friends. The correlation between them hit 0.91—a record. Historically, these assets move in opposite directions. Stocks scream risk, while gold whispers safety. But not this time.

Gold surged 30% last year, its best run since 2010, while the S&P 500 added trillions to its value. The U.S. Dollar Index rose 7%, and the 10-year Treasury yield climbed 22%. That all three moved up together is almost unheard of.

Central banks added 794 tonnes of gold in 2024, their third-largest buying spree this century. China led the charge, snapping up gold as deflation fears loomed. Meanwhile, Bitcoin and gold—two assets that usually compete as “safe havens”—broke their inverse relationship, outperforming the S&P 500 together.

Bitcoin and gold ETFs now hold $130 billion in assets combined. Investors are piling in, seeing these assets as shields against inflation, geopolitical chaos, and market instability.

The Federal Reserve’s playbook is changing. After a year of aggressive rate hikes in 2022, the Fed has slowed down. Rate cuts are happening, but not at the pace Wall Street wants. Inflation is sticking around, with money supply growth hitting a 20-month high.

This makes the January Consumer Price Index (CPI) and Producer Price Index (PPI) reports critical. These numbers will shape the Fed’s outlook for 2025 and determine whether more cuts are on the table.

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