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Rising Yields Wreak Havoc on Stocks Outside AI Trade, Hitting Small Caps and Banks
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The article reports that while the S&P 500 remains near all-time highs, driven by AI-related stocks, rising interest rates are severely damaging other market segments. The 10-year US Treasury yield recently hit 5.34%, the highest since 2002. This has led to significant declines in rate-sensitive areas: the S&P 500 equal-weight index is on track for its seventh consecutive weekly loss, the Russell 2000 small-cap index is down 8.5% from its record, the KBW Bank Index has fallen over 12% into a correction, and the S&P 500 Utilities sector is nearing bear market territory. Unprofitable tech and speculative stocks are also underperforming. Experts quoted include Dan Suzuki of iCapital, who links the damage to rising rates and tighter financial conditions, and Eric Diton of The Wealth Alliance, who warns that the biggest risk to the market is a failure in AI investment. The article uses five charts to illustrate the underlying market pain.
Source report
Source: Bloomberg
After the 10-year U.S. Treasury yield surged to 5.34%—its highest level since 2002—stock traders are fiercely debating when the bond selloff will begin to impact the resilient U.S. equity market. Beneath the surface, however, rising interest rates are already causing significant damage.
The S&P 500 sits less than 2% below its all-time high, but interest-rate-sensitive segments—including small-cap stocks, banks, and utilities—have been hit hard. Since the Federal Reserve raised interest rates for the first time in three years to curb inflation, unprofitable technology companies and speculative stocks with the weakest balance sheets have underperformed the benchmark index.
“A large portion of the market is down at least 5% from its highs, not to mention sectors that are down more than 15%,” Dan Suzuki, global investment strategist at iCapital, told Bloomberg Television. “That has a lot to do with rising interest rates and the tightening of financial conditions that comes with it.”
The U.S. stock market finds itself in a unique moment: the index level is supported by the AI trade, while simultaneously facing heightened geopolitical risks, rising interest rates, and uncertainty surrounding the U.S. midterm elections—factors that have historically triggered market turmoil.
“As long as economic and profit growth remain strong, the stock market can tolerate higher yields for now,” said Eric Diton, president of The Wealth Alliance. “But the biggest risk to equities is a problem with AI buildout. If profit outlooks are downgraded, it will trigger broader pain across the market.”
The following five charts reveal the distress beneath the surface of the stock market:
Equal-Weight Index Declines
The S&P 500 Equal Weight Index is on track for its seventh consecutive weekly decline, raising concerns about narrow market breadth. If the losing streak continues through Friday, it would mark only the third time in history—following the aftermath of the dot-com bubble burst in 2002 and the 2022 bear market.
Small-Caps Under Pressure
The Russell 2000 Index has fallen 8.5% from its record high on August 14, nearing a correction. More than one-third of the index consists of "zombie stocks"—companies that struggle to pay their debt interest.
Bank Stocks Hit Hard
The KBW Nasdaq Bank Index has dropped more than 12% from its mid-August peak, entering correction territory. Capital One Financial, Wells Fargo, and Huntington Bancshares are down 20%, 14%, and 12% year-to-date, respectively.
Defensive Sectors Disrupted
The S&P 500 Utilities sector has fallen approximately 17% from its February record, approaching bear market territory. In the third quarter, both the electric company industry group and electric utilities declined more than 10%.
Risk Stocks Sold Off
Goldman Sachs’ basket of unprofitable tech stocks fell 11% in the third quarter, marking its second-worst quarterly performance since 2014. Stocks with the weakest balance sheets rose just 1.9% in the third quarter, the smallest quarterly gain since early 2022.
“We don’t think the bond yield surge will spiral out of control,” said Jimmy Lee, CEO of Wealth Consulting Group. “Investors are simply selling interest-rate-sensitive stocks and rotating back into tech after the deep selloff earlier this year. But the biggest risk to the S&P 500 is an unexpected collapse of the AI trade.”
https://www.bloomberg.com/news/articles/2026-10-01/rising-yields-are-wreaking-havoc-on-stocks-outside-the-ai-trade
Source
bloombergWestern