Ruchir Sharma, founder of Breakout Capital, emphasized on CNBC that a sustained rise above 5% in the 10-year Treasury yield could disrupt equity markets, especially affecting the AI trade. He described the 10-year Treasury as a crucial asset that influences stock valuations and borrowing costs across the economy.
Historical data indicates that once yields surpass 5.25%, equity prices tend to decline. Recently, the yield approached a 19-year high, driven by high oil prices and inflation concerns, prompting the Federal Reserve to raise interest rates. Sharma warned that persistent inflation could lead to further rate hikes, complicating the market environment.
He noted that while corporate balance sheets are healthier than in the past, the combination of higher capital costs and increased capital intensity in the tech sector has diminished the value of future cash flows, aligning tech valuations closer to the broader market average