Yields and stocks traditionally move in opposite directions. Higher borrowing costs usually pressure corporate profits. Yet the 10-year US Treasury yield climbed to its highest level since 2002, while the Nasdaq Composite set a fresh record the same day — as if two long-time rivals suddenly began marching in step.

Stock index dynamics

Interactive Brokers argues the AI boom is discounting worries about expensive money. If the upside from technology appears nearly limitless, investors care less that borrowing is getting pricier.

The bullish force for equities is the tech-sector rally. Nvidia closed at a new record high for the first time since May, while memory-chip makers Western Digital and Seagate Technology ranked among the top S&P 500 gainers. The market cap of the Magnificent Seven hit a record $24.8 trillion, larger than the nominal GDP of every nation except the United States.

The world's largest company by market value, Nvidia, finished trading at a record $5.76 trillion, and Microsoft neared $4 trillion after a 1.5% share rise to the highest level since last October. The advance was broad: every S&P 500 sector except one posted gains.

US yield-curve dynamics

Risk appetite is also supported by a changing shape of the yield curve. Not long ago, short rates were rising faster than long rates on bets of Fed tightening. Since September 23, the 10-year yield has increased by roughly 20 basis points, while the two-year yield has moved lower. The spread is expanding like a spring after long compression, and investors read this as confidence in sustained growth rather than a recession signal.

Headwinds for equities had included last month's Fed hike, higher energy prices, and a renewed spike in inflation fears that fueled a global bond sell-off. Investors appear to have weathered these risks, banking on strong corporate profits, resilient consumer spending, and AI-related investment growth.

It is not pure risk-on everywhere. Asset Management One sees an element of a flight to quality within the rally — a rotation into S&P 500 issuers with high profitability, low leverage, and weak cyclicality. In its view, capital has flowed into higher-quality large caps as yields rose.

I wouldn't rush to dismiss the megacap tech rally, but the belief that AI benefits are infinite sounds like an echo of the dot-com bubble.

Technically, the daily chart shows that the S&P 500 continues to recover its uptrend. Long positions established above 7,685 should be held and scaled.