On the surface, it's been another banner year for Wall Street. Earlier this month, the ageless Dow Jones Industrial Average (^DJI +0.59%), benchmark S&P 500 (^GSPC +1.18%), and innovation-inspired Nasdaq Composite (^IXIC +2.07%) all rallied to fresh record highs, driven by the artificial intelligence (AI) infrastructure build-out.
But dig beneath this facade and investors will discover that Wall Street's historic rally is showing signs of weakening. Although inflation is arguably the biggest wildcard for the stock market, it's U.S. Treasury bond yields that are sending a clear and terrifying message to Wall Street and investors.
Image source: Getty Images.
The Iran war has lifted inflation to a three-year high
While a modest level of inflation (rising prices) is normal and healthy for the U.S. economy, the inflationary effects stemming from the Iran war are causing concern.
Not long after President Trump gave the OK for the U.S. military to attack Iran, the latter closed the Strait of Hormuz to virtually all commercial shipping vessels. This disrupted approximately 20% of worldwide crude oil demand, leading to a rapid rise in energy prices. Gas prices rose at the fastest pace in over three decades.
US inflation is red hot.
-- The Kobeissi Letter (@KobeissiLetter) May 28, 2026
1. CPI Inflation: 3.8%, highest since May 2023
2. PCE Inflation: 3.8%, highest since May 2023
3. PPI Inflation: 6%, highest since March 2023
4. Services Inflation: 3.4%, highest since Sept 2025
5. Shelter Inflation: 3.3%, highest since Sept 2025
6.... pic.twitter.com/u8kaSN54G3
In February, before the effects of the Iran war were visible in economic data, trailing 12-month (TTM) inflation was just 2.4%. But before the May inflation report was released, the Cleveland Fed estimated TTM inflation would rise to nearly 4.2%.
While most of this increase has been driven by fuel prices, energy supply shocks often have several stages. Once the delayed inflationary effects on businesses start showing up in economic data in the form of higher transportation and production costs, TTM inflation can move even higher.
Image source: Getty Images.
Treasury yields tell an unfiltered story that Wall Street won't like
The rapid rise we've observed in inflation has professional and everyday investors alike questioning whether the Federal Reserve will raise interest rates or stand pat. But if investors take a closer look at Treasury yields, they'll have the answer they're looking for.
The bond market is arguably far more adept than the stock market at moving beyond emotion and subjectivity to offer an unfiltered story. Recently, the two-year Treasury yield jumped to 4.16%, its highest level since February 2025. Meanwhile, the 10-year Treasury yield pushed to its highest point since January 2025.
Treasury yields, which have been soaring since early March, indicate the bond market anticipates interest rate hikes from the Fed in the foreseeable future.
TREASURIES SIGNAL FED MAY NEED HIGHER RATES
-- *Walter Bloomberg (@DeItaone) June 9, 2026
US Treasury markets are pushing back against expectations of lower rates, with 2-year yields rising above 4.1% and pricing in potential hikes as soon as October. Traders say strong economic data and persistent inflation risks suggest... pic.twitter.com/6yNIZdjpY3
Rate hikes are a particularly scary proposition for a historically pricey stock market. We entered the year with the expectation that the Fed would undertake several rate cuts in 2026-2027. Lower lending rates would help fuel the costly AI data center build-out.
With the prospect of interest rate cuts practically gone, investors may be forced to reset growth expectations and otherworldly premiums for the AI stocks that have lifted the Dow, S&P 500, and Nasdaq Composite to new heights.
Historically, S&P 500 Shiller Price-to-Earnings (P/E) Ratios above 30 have foreshadowed trouble for the stock market. It may not take much of an ideological shift from the Fed to push Wall Street over the edge.
