Market Week: AI Stocks Celebrate – the Bond Market Sounds the Alarm

The trading week from September 21 to 25 produced an unusual contrast.

Risk appetite returned to the equity market. The Nasdaq reached a record high on Tuesday, the S&P 500 gained 1.2 percent over the week and the Nasdaq as much as 2 percent. Globally, equity funds attracted net inflows of 44.1 billion dollars – the highest amount since early July. US equity funds alone drew in 37.6 billion dollars.

At the same time, the bond market sent a very different signal.

The yield on ten-year US Treasuries temporarily rose to 5.2297 percent on Friday, its highest level since 2007. Thirty-year US government bonds even reached 5.5319 percent – their highest level since 2004. Volatility in the US bond market, measured by the MOVE Index, jumped by around 30 percent within a single week.

Equities are buying growth.

Bonds are demanding a higher price for capital.

The markets moved between these two worlds this week.

The equity market continues to bet on AI

Once again, artificial intelligence provided the decisive impulse.

Meta gained around 13 percent over the course of the week after its new AI assistant Muse was strongly embraced by users. Since its launch in early September, the stock has at times gained more than 20 percent and added over 200 billion dollars in market value.

On Friday, Microsoft jumped 3.7 percent after the company unveiled new Copilot features, including a coding assistant and permanently active AI agents. Qualcomm gained 4 percent and Dell 5 percent. Akamai also rose sharply after announcing an 11.6 billion dollar cloud deal with Anthropic.

This helps explain why the major US indices have so far coped comparatively well with rising interest rates.

The market expects AI investment not only to generate growth but increasingly to translate into real revenues and profits. According to Goldman Sachs, AI investment now accounts for almost half of this year’s earnings-per-share growth in the S&P 500.

The crucial change is therefore not that investors suddenly consider high interest rates irrelevant.

They are betting that certain companies can grow faster than their financing costs are rising.

Yet the bond market is becoming more sceptical about the AI boom

What is particularly striking is that the same companies are now being treated differently in the bond market.

Investors are increasingly demanding higher risk premiums on bonds issued by major AI companies. The reason is not fear of default. Companies such as Meta, Alphabet and other hyperscalers have strong balance sheets.

The problem is the enormous amount of capital they require.

According to Goldman Sachs estimates, gross debt among the major hyperscalers alone could rise to 420 billion dollars in 2027 – 60 percent more than expected for 2026. Risk premiums on AI-related corporate bonds now stand at around 115 basis points, compared with 78 basis points for the broader investment-grade market.

This is creating a remarkable divide within the same AI boom.

Equity investors are celebrating the expected profits.

Bond investors are increasingly asking how expensive it will be to generate them in the first place.

This second calculation is likely to become more important in the years ahead.

After all, data centres, chips, power grids and cloud infrastructure are not built for free. The longer government bond yields remain high, the more expensive it becomes to finance these investments.

Oil falls below 100 dollars – then rebounds

Oil remained the second major driver of the week.

At the start of the week, Brent temporarily fell below 100 dollars per barrel. Hopes of diplomatic progress between Washington and Tehran, together with rising Saudi supplies, provided some relief. On Wednesday, however, oil jumped by almost 4 percent before prices fell sharply again on Friday.

Brent ended Friday at 104.32 dollars per barrel. Over the week, it still posted a gain of less than 1 percent. WTI, by contrast, lost around 8 percent and closed at 92.41 dollars.

The unusually wide divergence shows just how strongly political and regional factors are now influencing the oil market.

US and Iranian negotiators are currently examining a step-by-step path out of the war. Under the proposal, Iran would fully reopen the Strait of Hormuz while Washington, in return, would ease its economic blockade. No agreement has yet been reached.

At the same time, Houthi attacks on Saudi Arabia are continuing. Oil is therefore becoming less of a conventional commodity price and more of a permanent news indicator for geopolitical risk.

Hormuz remains the fastest route from geopolitics to inflation

Before the start of the Iran war, around 20 percent of global oil supplies passed through the Strait of Hormuz.

In the week since September 20, preliminary Kpler data show that 33.7 million barrels of crude oil were transported through the strait. Volumes are therefore roughly in line with the previous week – but a return to normal is still a long way off.

For financial markets, even the prospect of diplomatic progress is enough to move several asset classes at once.

Oil falls.

Inflation expectations decline.

Bond yields ease.

Equities rise.

That was exactly the mechanism seen on Friday: oil prices fell by around 2 percent and previously sharply rising US bond yields eased somewhat.

The past few weeks have therefore demonstrated just how closely energy and capital markets are now linked.

The real stress remains in the bond market

Despite Friday’s decline, yields remain exceptionally high.

The ten-year US Treasury yield moved clearly above 5.2 percent during the week for the first time since 2007. Thirty-year bonds traded at their highest level in more than 20 years. Government bond yields in the eurozone also rose for a seventh consecutive week.

Several factors are driving the move.

Inflation remains high.

The economy is holding up better than expected.

Central banks are signalling further tightening.

Governments and companies alike require enormous amounts of capital.

Federal Reserve officials also made clear this week that inflationary pressure can no longer be explained by oil and tariffs alone. Richmond Fed President Tom Barkin also pointed to strong demand and broader economic momentum.

Financial markets are therefore now pricing in a probability of more than 60 percent that the Federal Reserve will raise rates again in October.

“Higher for longer” is increasingly turning into a different question:

How much higher?

German consumers are already feeling the oil price

While US equity markets are benefiting from AI euphoria, the picture in Germany remains considerably more subdued.

The DAX closed Friday at 25,408.64 points. It gained only 0.4 percent over the week, but at least ended a three-week losing streak. The STOXX 600 rose 0.5 percent over the week.

At the start of the week, the Bundesbank said that the German economy had lost momentum over the summer. Weaker exports, subdued consumption and low water levels were weighing on activity. Although it still expects a moderate recovery in the final quarter, it explicitly points to developments in the Middle East and energy prices as risks.

The strain became even clearer on Friday in consumer sentiment.

Germany’s consumer climate indicator for October fell from a revised minus 26.8 to minus 30.6 points, far more sharply than expected. Income expectations dropped to their lowest level since April. At the same time, the propensity to save rose to its highest level since the 2008 financial crisis.

The survey identifies the cause quite clearly:

Many households expect high energy prices to erode their purchasing power. The geopolitical conflict has therefore finally reached everyday life in Germany.

Not abstractly through stock market prices, but through income expectations, consumption and saving behaviour.

Europe benefits temporarily from falling oil prices

At the same time, the STOXX 600 showed just how directly oil prices are now affecting individual sectors.

On Friday, energy stocks were among the weakest sectors, falling 1.3 percent. Airlines, by contrast, benefited from lower fuel costs: Ryanair and Lufthansa each gained more than 2 percent. Banks rose 1.3 percent.

This illustrates the new market mechanics.

A lower oil price is not simply “good for equities”.

It redistributes gains and losses.

Producers lose pricing power.

Transport and travel companies gain cost flexibility.

At the same time, pressure on central banks declines.

Gold loses the battle against 5 percent yields

Gold shows how high interest rates can now outweigh even geopolitical crises.

The precious metal lost around 2.1 percent this week. On Friday, spot gold traded at around 4,283 dollars per ounce.

At first glance, that seems paradoxical.

The war with Iran is not over.

The Strait of Hormuz remains uncertain.

Inflation risks are high.

All classic arguments in favour of gold.

But a ten-year US Treasury yielding more than 5 percent changes the calculation. Gold generates no running income. When safe yields rise, the opportunity cost of holding the precious metal increases.

Gold is therefore telling the same story as the bond market:

Safety once again has a price. And now it even pays interest.

44 billion dollars show that investors are still buying risk

What makes this week particularly striking is how aggressively investors returned to equities.

Globally, equity funds attracted net inflows of 44.1 billion dollars. Technology funds received 5.29 billion dollars – the highest amount since the end of July. At the same time, government bond funds recorded net outflows of 1.47 billion dollars.

This is not a classic flight from high interest rates. It is a selection decision.

Investors are not withdrawing from risk altogether. They are concentrating on areas where they expect sufficient earnings growth to offset high financing costs.

At the moment, that area is primarily:

artificial intelligence.

Equities and bonds can therefore send seemingly contradictory signals without actually contradicting one another.

What this trading week really told us

The big story this week is therefore somewhat different from the previous few weeks.

Oil and interest rates remain important. But it is becoming increasingly clear what they are doing within the markets.

Capital is becoming more expensive.

And that means the market is increasingly separating companies, sectors and economies that can offset high capital costs through growth from those that cannot.

AI companies are currently on the winning side of that equation. But even there, the bond market is beginning to reveal limits.

Share prices of major technology companies are rising while their creditors demand ever higher premiums to finance the enormous infrastructure boom.

Germany is on the other side of the equation.

Here, high energy prices are meeting weaker consumption and a fragile economic recovery.

The common thread is therefore no longer simply:

Oil drives inflation, inflation drives interest rates.

It has become:

High interest rates are changing what kind of growth is still worth pursuing.

What matters in the coming week

The coming week will test this calculation on several fronts.

On Wednesday, the US Commerce Department will publish the PCE price index for August – the Federal Reserve’s preferred measure of inflation. Core inflation most recently stood at 3.3 percent and therefore remains clearly above the Fed’s target. Updated figures on US gross domestic product and corporate profits will be released on the same day.

Micron will also report quarterly results on Wednesday. Following the renewed AI rally, the memory-chip maker will provide an important test of whether the high expectations surrounding the infrastructure boom are being confirmed by actual earnings.

The most important economic release of the week follows on Friday: the US jobs report for September. Economists currently expect around 100,000 new jobs and an unemployment rate of 4.2 percent. A significantly stronger report would likely increase expectations of another rate hike in October.

On the same day, Eurostat will publish its first estimate of eurozone inflation for September. The final August rate stood at 3.2 percent, with energy making a particularly strong contribution to the increase.

And above all these data points remains the political variable that no central bank can control.

The Strait of Hormuz.

If talks between Washington and Tehran genuinely make progress, oil prices could come under sustained pressure for the first time in months.

That would change several calculations at once.

Inflation.

Interest rates.

Bonds.

And therefore equity valuations.

If the talks fail, the same chain of cause and effect that has accompanied the markets for weeks is likely to return.

Only this time with significantly higher bond yields.

Stefanie S. Klief