US 10-year Treasury yields have surged to 5.34%, their highest level since 2002, yet investors continue to pour money into Artificial Intelligence stocks. While major tech companies are taking on more debt to fuel massive infrastructure projects, the market is facing questions about whether current valuations can survive the rising cost of borrowing.
The global stock market is witnessing a unique contradiction as of October 2026. While US 10-year Treasury yields have climbed to 5.34%—a level not seen since 2002—major technology indices continue to trade near record highs. Typically, when government bond yields rise, stocks become less attractive because investors can earn a safe, guaranteed return from bonds. However, the current rally in Artificial Intelligence (AI) stocks is fueled by the belief that these companies will create massive productivity gains that outweigh the burden of higher interest rates.
The Shift Toward Debt-Funded Expansion
For years, major technology companies relied on their own massive piles of cash to fund growth. That model is shifting as the race to build AI infrastructure becomes increasingly expensive. In 2026, tech giants are expected to spend approximately $863 billion on AI-related infrastructure. Importantly, about $282 billion of this—nearly one-third—is being funded through external borrowing rather than internal cash flow. This reliance on debt makes these companies much more sensitive to interest rate changes than they were in the past. If the cost of borrowing remains high or increases further, the interest payments on this new debt could begin to eat into profit margins, a risk that investors are currently choosing to overlook in favor of growth narratives.
Record Margin Debt and Market Vulnerability
Beyond corporate debt, the individual investor's behavior is also adding to the market's fragile state. By June 2026, margin debt—money borrowed from brokers to buy stocks—hit a record $1.5 trillion. This indicates that a significant portion of the current rally is supported by borrowed money. When the market is heavily leveraged, any sudden decline in stock prices can trigger forced selling. If prices dip, brokers may require investors to sell their holdings to cover their debts, which can accelerate a market downturn regardless of the underlying company performance.
Valuation Risks and Future Monitorables
While the AI growth story is strong, valuation models are under pressure. Historically, when interest rates are high, the price that investors are willing to pay for future earnings tends to drop. The current market strength assumes that AI will deliver massive profits in the near future. If this productivity boost fails to materialize or takes longer than expected, the market could face a sharp correction. Analysts are particularly cautious about whether the high spending on data centers and chips will translate into sustainable revenue growth fast enough to justify the current stock prices.
Moving forward, investors will be closely watching data regarding US inflation and Federal Reserve policy. If inflation remains sticky, forcing the Federal Reserve to keep interest rates higher for longer, the pressure on both corporate debt and stock valuations will likely intensify. The key monitorable for the coming quarters will be the actual earnings growth of these tech firms versus the interest expense they are accumulating to fund their AI expansion.