Will Higher Rates Break the Bull Market?
Fading Mag 7 leadership and rising rates haven’t stopped stocks yet
Maybe this market is having its Moneyball moment. The superstars still matter, but the overlooked players are finally putting runs on the board.
Moneyball was built around a simple idea: finding value where everyone else wasn’t looking. The Oakland A’s, working with a fraction of the payroll of baseball’s richest teams, used data to identify overlooked players who could collectively compete with expensive superstars.
Wall Street may be experiencing its own version in 2026.
Stocks remain near record highs despite sticky inflation, higher long-term interest rates, tariff and energy pressures, and growing questions about whether the massive AI capital-spending boom can live up to lofty expectations. Yet beneath the surface, market leadership is changing.
The Magnificent Seven, which powered much of the bull market over the past three years amid the AI boom, are no longer doing all the heavy lifting. At the same time, long-term interest rates have climbed to levels not seen since 2007.
Through late July, the S&P 500 was outperforming the Magnificent Seven stocks as tracked by the MAGS ETF, as shown in the chart below. More importantly, roughly two-thirds of S&P 500 stocks had advanced even as mega-cap technology weakened, helping fuel stronger performance from the equal-weight S&P 500.
That doesn’t look like investors running for the exits ahead of a bubble bursting. It looks more like a bull market changing drivers.
The Other 493 Keep Showing Up
For much of the past three years, investors could almost be forgiven for thinking the S&P 500 stood for the S&P Seven. The AI boom fueled extraordinary earnings growth and helped a handful of mega-cap technology companies dominate both market returns and the index itself.
That concentration remains striking. As the chart below shows, the ten largest companies now account for roughly 40% of the S&P 500, near historic highs. But concentration cuts both ways. When the biggest stocks stop leading, the rest of the market has to pick up more of the load. So far in 2026, that is exactly what has been happening.
That is increasingly what we are seeing. Leadership has broadened beyond mega-cap technology into financials, healthcare, industrials, utilities, materials and other parts of the market, while small and midcap stocks have also participated.
That matters because mega-cap tech does not need to collapse for other areas to outperform. Market leadership can rotate as earnings growth and investor expectations change, without requiring another dot-com-style reckoning. So far, this looks more like rotation than retreat. This does not mean investors are abandoning AI. They may simply be moving downstream. The first phase rewarded companies designing chips, models and software. The next phase increasingly involves electricity, financing, cooling equipment, industrial machinery, materials and infrastructure. We often refer to this phase as the “picks and shovels” rotation.
Sometimes the market simply passes the baton.
AI Has a New Problem: The Price of Money
If you challenge conventional wisdom, you will find ways to do things much better than they are currently done. – Michael Lewis, Moneyball
The largest tech companies are hardly running out of cash. Microsoft, Alphabet, Meta, Amazon and their peers remain among the strongest businesses in the world. Still, the AI buildout has become increasingly capital intensive, and more of that capital is flowing through the bond market.
Alphabet, Amazon and Meta had issued nearly $220 billion of bonds in 2026 by mid-August, more than double their combined issuance for all of 2025, according to LSEG data reported by Reuters. The Wall Street Journal separately reported roughly $244 billion of 2026 bond issuance from a broader group of AI-linked companies. That flood of borrowing is beginning to test investors’ appetite. (Reuters, 8.14.2026)
That changes the conversation. For the first phase of AI, investors mostly asked how fast revenue could grow. The next question is tougher: What return are companies earning on all this capital? Reuters estimates that capital spending by five major U.S. hyperscalers could rise by about $534 billion by 2027, outpacing the expected increase in operating cash flow. Eventually, sales, margins and free cash flow have to justify the spending. (Reuters, 7.22.2026.)
Nvidia sits at the center of that debate. Extraordinary results eventually become ordinary expectations. When investors already expect perfection, merely being excellent can disappoint. That does not mean the AI story is ending. It means the hurdle is getting higher. Now with sticky higher rates and the bull maket, investors will need to check their behavior and their portfolio with many ominous bubble predictions coming out in the headlines.
Bubble? Check the “Four O’s”
People in both fields operate with beliefs and biases. To the extent you can eliminate both and replace them with data, you gain a clear advantage. – Michael Lewis, Moneyball
Every tech revolution attracts bubble warnings. Earlier this summer we introduced what we call the Four O’s: overvaluation, overspeculation, overleverage and overconfidence. (see chart) Today’s AI boom arguably checks some of those boxes. Valuations remain elevated, expectations are enormous and capital spending is historic.
But this is not 1999. The largest AI companies generate real earnings and possess formidable balance sheets. The greater risk may be less about AI being fake and more about investors paying too much for future growth, or companies spending too aggressively to capture it. A great technology can still be a poor investment at the wrong price.
The Bond Market Is Taxing the Boom
This is where the AI story collides with the bond market. The 30-year Treasury yield reached roughly 5.34% last week, its highest level since 2007, (see chart below) as investors wrestled with inflation, federal deficits, government financing needs and heavy AI-related corporate borrowing. The Treasury Department responded by increasing long-dated bond buybacks, but the relief was brief. (Reuters, 8.21.2026.)
Higher yields have not broken the stock market. At least not yet, but have put pressure on intermediate to long duration bonds for the past five years for diversified portfolios.
Stocks can tolerate rising rates when earnings and economic growth remain healthy. We have seen this before. From June 2004 through June 2006, the Fed raised the federal funds rate 17 times, from 1% to 5.25% and pushing 30 year mortgage rates up to nearly 7%. Yet stocks continued climbing because the economy and corporate profits remained strong. The S&P 500 kept advancing.
The trouble begins when higher borrowing costs start cooling housing, business investment and consumer spending, or when higher bond yields make expensive stocks harder to justify.
Money simply becomes more expensive. That matters when some of the world’s most valuable companies are simultaneously embarking on one of the largest capital-spending cycles in modern history.
Fear Is Not a Market Thesis
If you’ve got a dozen pitchers, you need to speak 12 different languages. – Michael Lewis, Moneyball
With dozens of economist and experts pitching their market outlook opinions every day on TV, Investors have no shortage of things to worry about: AI valuations, Treasury yields, inflation, federal debt, oil, geopolitics, the Fed and whether the next Nvidia earnings report can satisfy Wall Street. And yet the S&P 500 remains close to record territory. That disconnect between anxious investors and resilient markets has defined much of this bull market with the AAII Sentiment Survey lingering in bearish territory (see chart).
Concern does not end bull markets. Neither do high valuations or rising rates by themselves. As discussed above, they typically end from a combination of overages.
Problems become more serious when earnings weaken, credit deteriorates, leverage becomes excessive and investors continue paying unrealistic prices anyway. So far, earnings remain supportive and market leadership is becoming broader rather than narrower.
The Bottom Line: Higher rates and the bull market path into 2027 will be a balancing act. The next phase of this bull market may look considerably different from the first. Mega-cap tech led by the Magnificent Seven can remain enormously profitable without outperforming everything else. The S&P 493 can matter more. International stocks can matter more. Industrials, financials, energy, utilities, materials and infrastructure can participate alongside the companies designing AI chips and software.
Our outlook remains constructive as this bull market approaches its fifth year in 2027, although we expect greater volatility along the way. We do not currently foresee a recession or major bear market in the next year. But after several powerful years, future returns may depend less on investors paying ever-higher multiples for yesterday’s winners and more on earnings growth across a wider group of companies.
That is not necessarily a weaker bull market. It may simply be a more mature one, with the Magnificent Seven finally getting some company.
For more information on our firm or to request a complementary investment and retirement check-up with Jon W. Ulin, CFP®, please call us at (561) 210-7887 or email jon.ulin@ulinwealth.com.
Note: Diversification does not ensure a profit or guarantee against loss. You cannot invest directly in an index.
Information provided on tax and estate planning is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.
You cannot invest directly in an index. Past performance is no guarantee of future returns. Diversification does not ensure a profit or guarantee against loss. All examples and charts shown are hypothetical used for illustrative purposes only and do not represent any actual investment. The information given herein is taken from sources that are believed to be reliable, but it is not guaranteed by us as to accuracy or completeness. This is for informational purposes only and in no event should be construed as an offer to sell or solicitation of an offer to buy any securities or products. Please consult your tax and/or legal advisor before implementing any tax and/or legal related strategies mentioned in this publication as NewEdge Advisors, LLC does not provide tax and/or legal advice. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation, or needs of individual investors.
