Bonds Are in a Slow Motion Crisis And This Bearish Strategist Believes Stocks Will Follow

The S&P 500 has faced a rough patch leading up to the Jackson Hole symposium, weighed down by tech sector weakness. Wednesday marked another decline, and if Thursday closes lower, it would notch the index’s longest losing streak since January 2.

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Still, perspective matters. Despite recent turbulence, the S&P 500 (SPX) remains up 28% from its April 8 low and has only slipped just over 1% across the past four sessions hardly a full-blown panic.

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Yet, warning signs are flashing. Societe Generale strategist Albert Edwards, well-known for his bearish outlooks, issued a stark caution: a “slow-motion crisis” is brewing in government bond markets, and equity investors are ignoring it at their own risk.

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Why Rising Bond Yields Matter for Stocks

According to Edwards, the relentless rise in long-term bond yields is the key story. Instead of focusing on this trend, markets seem enamored with bullish signals like strong earnings reports and the AI-driven rally among mega-cap tech stocks the so-called “pot of gold at the end of the AI rainbow.”

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Recently, the surge in long bond yields has been pronounced, especially in the U.K. (30-year gilt yield at 5.586%) and Japan (30-year JGB yield at 3.186%), even as shorter-term rates decline except in Japan. In the U.S., the 30-year Treasury yield (TMUBMUSD30Y) hovered near 4.91% Thursday, up from its 52-week low of 3.936% last September. Meanwhile, the 2-year yield (TMUBMUSD02Y) sat around 3.758%, compared with a low of 3.549% in September.

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The implications? Edwards argues that this sharp rise has transformed equities from relatively cheap to “shockingly expensive” in record time. “Goodbye to the TINA era ‘There Is No Alternative’ and hello to a stretched elastic band that could eventually snap,” he warns.

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Tech Dominance and the AI Hype Factor

Edwards isn’t new to sounding alarms. He predicted the dot-com collapse and has been warning about a tech bubble since April 2024, even calling out an “everything bubble” in July. He admits these warnings haven’t panned out yet, joking that frustrated investors are probably sticking pins in models of him: “My ankles have been hurting for six months,” he quips.

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But the numbers back his concern. Tech now makes up over 37% of total U.S. market capitalization. Data from SocGen’s Andrew Lapthorne shows the top seven tech giants have ramped up capital spending by 60% over the past year, which is squeezing cash flows to historic lows. Add in skepticism from institutions like MIT about AI’s true profitability for end users, and cracks in the narrative start to show.

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Even so, Edwards concedes that bubbles usually pop when the Fed tightens policy and that doesn’t seem imminent. Still, with bond yields surging and equity cash flow yields shrinking, he warns it might take only a small confidence shock to trigger a major correction.

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Market Snapshot and Economic Data

Early Thursday trading reflects the nervous mood: Dow Jones (DJIA) -0.17%, S&P 500 (SPX) -0.21%, Nasdaq (COMP) -0.20%. Treasury yields are edging higher, with the 10-year (TMUBMUSD10Y) at 4.345% and the 2-year at 3.807%, while the U.S. dollar index (DXY) gains 0.31%.

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On the economic front, weekly jobless claims jumped by 11,000 to 235,000, the biggest rise in weeks. The Philly Fed manufacturing index plunged from 15.9 to -0.3 in August. Later today, investors will eye preliminary S&P U.S. services and manufacturing PMIs at 9:45 a.m., followed by existing home sales and leading indicators at 10 a.m.

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