Author: Ba Xiao Ling, Wu Xiaobo Channel
The AI bull market, which had been rebounding for a month and a half, appears to be nearing its end.
From last Friday to yesterday, global capital markets were hit by a wave of selling.
Last Friday was the most brutal. Global stock markets saw widespread declines. South Korea's KOSPI plummeted 6.12%, triggering a trading halt at one point. Japan's Nikkei 225 index plunged 6.22%. The three major US stock indices performed poorly, with the Nasdaq Composite falling 1.54%. China's Shanghai Composite Index lost 2.5% over two days, with two consecutive negative sessions shaking market confidence.
This Monday, the A-share and Hong Kong markets continued to show weakness. The Nikkei 225 fell 0.97%. In the evening, the three major US indices also opened and trended weaker.
Who pulled the market's bull back?
According to Morgan Stanley, the main suspect is the bond market.
On Monday (May 18th), during the Tokyo morning session, the Japanese bond market saw a significant adjustment. The yield on the 10-year government bond briefly touched 2.797%, setting a new market record in nearly three decades, reaching its highest point since October 1996. Previously, the US 30-year Treasury yield had also breached the 5% level, touching 5.12% in actual trading, a new high since 2007.
The trouble isn't limited to the US and Japan.
The yield on French 30-year government bonds is as high as 4.675%; Germany's 30-year yield is at 3.704%; and the UK's 30-year yield is even higher at 5.86%.
By Monday, although bond market volatility had eased compared to the sell-off that swept through markets on Friday, yields remained near multi-year highs.
This wave of selling in global bond markets is now threatening global stock markets. Morgan Stanley warns that if bond market volatility intensifies further, US stocks could see their first meaningful correction, which could lead to the end of the entire AI bull market.
High Bond Yields Weigh on Stocks
The Bond Market's "Maginot Line" Breached
In the bond market, bond yields and prices are inversely correlated. The more bonds investors sell, the higher the bond yields rise.
Michael Hartnett, chief strategist at Bank of America, believes that when the 30-year US Treasury yield crosses 5% and the 10-year yield breaks through 4.5%, it is a dangerous signal. Citing historical experience from the past century, he argues that once inflation crosses this threshold, capital markets may trigger large-scale deleveraging shocks, and risk assets often enter a correction phase. The S&P 500 index tends to fall by an average of 4% in the following three months and 7% within six months.
Thus, these two levels became the "Maginot Line" for the bond market.
Now, this line has been breached.
So, who is the culprit that broke through the bond market's defense line?
The answer is not difficult: it's the energy prices that the market has gradually become desensitized to over the past month or more.
Due to the substantive breakdown of US-Iran negotiations and the continued blockade of the Strait of Hormuz, international oil prices have risen sharply. As of the early hours of May 19th, Brent crude oil had returned above $110.
Brent Crude Breaks $110 Again
This has initiated a familiar transmission chain: Middle East geopolitical crisis → Global inflation reignites → Fed reversal expectations → Bond market sell-off.
On one hand, inflation is flaring up again in Europe and the US. Taking the US as an example, Labor Department data shows: The US Consumer Price Index (CPI) rose 3.8% year-on-year in April, higher than 3.3% in March, the highest level since June 2023. The US Producer Price Index (PPI) rose 6% year-on-year in April, reaching its highest level since December 2022.
Furthermore, according to data from prediction platform Kalshi, the probability of the US economy being hit by stagflation before the end of this year has risen from 11% to 40%.
On the other hand, the high inflation data has completely reversed market judgments about the Fed's policy path.
Under the threat of stagflation, the Fed may not only refrain from further rate cuts but might even plan rate hikes. Market forecasts now put the probability of a hike by July 2027 at 60%, meaning the market will quickly follow the Fed's lead in selling bonds, further pushing up Treasury yields.
This coincides with the critical juncture of the Federal Reserve chair transition. The first task for the new chair, Kevin Warsh, upon taking office might be to closely monitor the bond market and strictly guard against inflation.
Dongwu Securities believes that the direction of the US-Iran conflict determines the short-term trend of US Treasury rates. Signals of a turning point in the US-Iran conflict and oil prices, as well as late-May PCE data, are worth watching. In the long term, when Fed rate hike expectations strengthen, attention should shift to AI industry drivers and the resilience of US economic growth.
High Rates "Discount" Tech Stocks
So why does significant volatility in the bond market pull down stock markets?
Rising US Treasury market rates mean higher market risk-free rates. Consequently, the discount rate for tech stocks also rises, leading to a collapse in the valuations of US tech stocks.
The "discount rate" refers to the interest rate used to convert future cash flows into present value. It equals the risk-free rate plus a risk premium. For the same amount of money, the higher the discount rate, the lower its present value. For AI tech stocks, most of their value lies far in the future.
Therefore, when US Treasury yields rise, the discount rate increases, applying a harsher discount to future money. This is a heavy blow to tech stocks that rely heavily on future cash flows.
This is why, in the past, whenever the Fed hinted strongly at rate hikes or long-term bond yields jumped, the Nasdaq often led the decline.
Similarly, changes in bond yields also exert valuation pressure on tech stocks in the A-share market.
Calculated using the 10-year Treasury yield: On May 18th, the US 10-year yield was 4.63%, while China's 10-year yield was 1.76%, resulting in a negative spread of 2.87%. When this spread widens, it means the relative attractiveness of risk assets in emerging markets like China declines.
As an investor, when buying US Treasuries can yield 5%, why chase uncertain returns in emerging markets, taking on currency and investment risks?
China Securities Journal cited industry expert views, pointing out that rising government bond yields in multiple countries have put significant pressure on the tech sector, represented by artificial intelligence. Rising bond yields weaken investors' motivation to hold stocks. Additionally, rising international oil prices further reinforce rate hike expectations and suppress market risk appetite for tech stocks.
May 16th, Tokyo Stock Exchange, Nikkei Index Close
However, the outcome is not yet determined. Rich Privorozhskiy, a strategist at Goldman Sachs, believes the core market contradiction currently lies in the direct confrontation between the bond market and the AI boom, like an ongoing tug-of-war.
On the AI side, strong industry demand has given related tech stocks performance exceeding expectations, providing sustained and stable support for the foreseeable future. According to a China International Capital Corporation (CICC) research report: S&P 500 first-quarter earnings growth reached 28%, the highest since Q4 2021, with the semiconductor and equipment sector seeing growth as high as 99%. The situation in the A-share market is similar. Data shows that in Q1 2026, the revenue of the semiconductor equipment sector was 25.498 billion yuan, a year-on-year increase of 25.78%, with net profit attributable to shareholders reaching 4.446 billion yuan, a significant year-on-year jump of 60.42%.
Simultaneously, the AI boom itself has also accumulated considerable risks, which is the underlying reason why bond market movements can trigger volatility.
Earlier, UBS had already issued a clear warning that AI-related stocks and large-cap tech stocks were already severely overpriced, with growth expectations far exceeding reality. The bank's research showed that major tech stocks, including the "Magnificent Seven," exhibited excessive bullishness. Legendary investor Jim Rogers and Michael Burry, who predicted the 2008 subprime crisis, have both urged investors to reduce tech holdings and issued warnings about the AI frenzy.
How Should Ordinary Investors Respond to the New Changes?
Ray Dalio, founder of Bridgewater Associates, stated in April that the world is entering a new era dominated by "jungle rules," and investors must re-evaluate their wealth protection strategies.
In the face of these new developments, we have distilled some of the latest institutional opinions for reference:
Xinyuan Fund believes: Regarding the future trend of the A-share market, the liquidity environment has not undergone a trend change. Last week's market movements were more about high-volatility disturbances and emotional shocks, not the starting point of a systemic risk. They advise investors to increase flexibility, retain more liquid positions to cope with the high-volatility environment brought by rising US Treasury yields. In terms of sectors, they suggest continuing to focus on the AI industry chain, including domestic computing power, optical modules, and semiconductor equipment, as well as supporting directions like mechanical equipment and new chemical materials for the AI supply chain.
Huatai Securities believes: The A-share sentiment index has been running in the overheated zone for two weeks, with the valuation differentiation coefficient approaching the highs of 2021. Rebalancing pressure between sectors is rising, and the adjustment is likely to involve trading time for space. For allocation, they suggest continuing to hold core positions in tech themes like communication equipment and memory. Within the tech sector, switches could be considered towards semiconductor (core stocks) equipment, discrete devices, and other directions.
Bewildering geopolitical crises and the massive AI revolution are placing global markets in an awkward position. Whether to cash in or charge ahead, investors may need to do their homework carefully in the coming period.
As "the father of global investing," Sir John Templeton, said: "Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria."
