As the Fed Looms, Stock Bulls Cast a Wary Eye on the Global Bond Slump

The calendar flip to September a month notorious for its poor track record in U.S. equities has sparked fresh caution among bullish investors who have powered a 29% market rally since early April.

‍

At the center of concern is the sharp selloff in long-term U.S. Treasuries, which pushed the 30-year yield close to the 5% mark. Higher yields alter the fundamental math behind valuing future profits, forcing investors to reassess how they price growth stocks in particular.

‍

On Tuesday, profit-taking swept through markets. The Nasdaq 100 slipped 0.8%, with every member of the Magnificent Seven finishing lower. The S&P 500 also fell 0.7%, while the Cboe Volatility Index spiked from some of its lowest levels in years, signaling a rise in investor anxiety.

‍

One down day doesn’t define a trend, but turbulence in global bond markets added to the unease. Yields surged not only in the U.S. but also in Europe and Japan, reviving fears that expansive fiscal policies could reignite inflation even as the U.S. economy shows early signs of cooling.

‍
Recent weakness in the labor market has bolstered bets that the Federal Reserve will cut short-term rates at its September 17 meeting. However, the persistence of inflation risks is keeping long-dated Treasury yields elevated.

‍

“When a big round number like 5% pops up on the 30-year Treasury, volatility tends to increase because some investors worry that Washington is losing its grip,” explained Michael Purves, CEO of Tallbacken Capital Advisors. “On top of that, algorithm-driven selling often accelerates when yields hit key thresholds.”

‍

A move beyond 5% on the 30-year yield has sent mixed messages before. Back in May, crossing that line triggered a 2.3% drop in the S&P 500 and pushed the VIX above 22. But when yields spiked again in July, equities barely flinched, and the rally marched on.

‍

This time feels different because yields are climbing alongside renewed concerns about stretched stock valuations. After a four-month surge, the S&P 500 trades at roughly 22 times forward earnings a multiple surpassed only during the dot-com bubble and the post-Covid rebound in the past 35 years.

‍

Even with the Fed expected to lower short-term rates which could pull down the two-year yield investors remain uneasy. Mounting federal debt means a flood of long-dated Treasuries is likely, giving buyers leverage to demand higher returns.

‍

“If inflation starts creeping back, long-term rates will rise no matter what the Fed does with the short end of the curve,” said Matt Maley, chief market strategist at Miller Tabak + Co.

‍

Adding to the complexity, former President Donald Trump has intensified his criticism of the Fed, calling for steep rate cuts a move that could worsen inflationary pressures tied to his unpredictable tariff strategies.

‍
Meanwhile, a federal appeals court recently ruled that most of those tariffs were invalid but postponed enforcement until mid-October. Rolling back tariffs would remove a revenue source for the government, while simultaneously easing price pressures.

‍

For stock investors, the implications of elevated yields are straightforward but worrisome. Rising rates typically signal uncertainty about economic growth and raise questions about how higher borrowing costs will impact companies and consumers.

‍

“It really comes down to what this means for earnings growth,” Maley noted. “And that’s not a positive for a market that’s already expensive.”

‍