The Whash Storm is Coming

Author: Ding Ping

Wosh is not the storm itself, but he might reveal to the market that when the storm arrives, the Federal Reserve is no longer in the same position as before.

In the past two years, tech giants like Nvidia, Microsoft, and Meta have continuously broken market cap records, with AI almost redefining the entire market’s risk appetite, and the S&P and Nasdaq being pushed higher all the way.

But if you break down this round of market rally, AI is actually just the story on the surface; what truly supports U.S. stock valuations is another, more critical premise: long-term interest rates will eventually come down.

Only if this premise holds can the market continue to pay high premiums for future earnings, discount the growth narratives of a few tech leaders into today, and keep chasing valuations of 30, 40 times or even higher.

But now, this premise is becoming unstable.

The 30-year U.S. Treasury yield has been rising steadily, recently surpassing 5%. For a highly concentrated, expensive, and extremely dependent on future earnings narratives U.S. stock market, the longer the long-term rates stay high, the more fragile the valuation system becomes.

Even more troubling is that this pressure may intensify.

On May 15, Jerome Powell, who has been Fed Chair for 8 years, officially stepped down, and Kevin Wosh became the next Chair. Compared to Powell, Wosh might be more tolerant of market pressure, more committed to shrinking the balance sheet, and less inclined to covertly backstop the financial markets.

Once long-term rates continue to rise and the Fed no longer quickly calms the markets as before, the logic that once supported high U.S. stock valuations could start to unravel.

The current fragility of U.S. stocks

It’s because long-term interest rates can’t be pushed down.

Recently, the market has overly focused on whether the Fed will cut rates, neglecting a key issue: long-term rates are no longer following monetary policy.

In theory, when the central bank cuts rates, short-term rates decline directly. If the market believes rates will stay low, long-term rates should also fall. But an unexpected situation has emerged: even if the Fed does not raise rates, the 30-year U.S. Treasury yield continues to climb, reaching a high of 5.13% on May 15. This indicates that the market does not believe U.S. long-term risks will decline, and thus demands higher risk premiums.

This is precisely where U.S. stocks are most vulnerable right now.

The reason long-term rates stay high is rooted in at least three factors.

First, inflation has not fallen smoothly as the market expected.

Latest data shows that U.S. April CPI rose 3.8% year-over-year, hitting a nearly three-year high, with core CPI increasing to 2.8%. More troubling is that the risk of U.S.-Iran conflict has not truly eased, oil prices remain high, and concerns about imported inflation are intensifying. As long as inflation expectations cannot be fully subdued, long-term rates will struggle to decline.

Second, U.S. fiscal issues are also eroding confidence in its long-term fiscal constraints.

By October 2025, U.S. national debt has surpassed $38 trillion; in just five months, this exceeded $39 trillion. Behind this is a long-term fiscal deficit (high military and social welfare spending). The U.S. Treasury issues new bonds to pay off maturing debt, and these new bonds come with higher interest costs, leading to a “Ponzi-like” cycle of debt—requiring continuous expansion of debt to maintain the system.

Third, the supply-demand structure of U.S. debt is worsening.

On one side, the Treasury continues to increase debt issuance; on the other, foreign holdings are decreasing, as the world is de-dollarizing. Foreign official sectors are reducing their U.S. debt holdings, which now account for 24% of global reserves—a downward trend. Supply is increasing, but demand is weakening, making it harder to push down long-term rates.

When these risks are not alleviated, U.S. Treasuries are no longer just safe assets; investors will naturally demand higher risk premiums.

This is especially dangerous for U.S. stocks.

Because currently, U.S. stocks are not a broadly undervalued market slowly realizing earnings, but a highly concentrated market supported by a few leaders, extremely sensitive to discount rates.

If long-term rates stay high, discounting future cash flows becomes much more severe, and valuation tolerance narrows rapidly. By then, the companies first hit by the shock may not be the worst fundamentals, but those with the best fundamentals whose valuations have already been squeezed the most.

Bank of America’s Hartnett also said that once the 30-year Treasury yield exceeds 5%, rising financing costs and falling risk appetite will hit high-valuation tech stocks hardest.

This was demonstrated in October 2023.

At that time, the 30-year Treasury yield briefly broke 5%, and the Nasdaq index fell about 10% over a few months. Investors still believed that if financial conditions worsened, the Fed would eventually signal reassurance. But if Wosh’s arrival begins to loosen that expectation, the same long-term rate shock will be perceived very differently by the market.

Many compare today to 2007, but the real lesson isn’t that interest rates were high then, but that the damage from high rates to the financial system is never instant. It’s more like a chronic erosion: first squeezing financing, then valuation, then balance sheets, and finally forcing out the most fragile links in the system.

In 2007, the real collapses were in real estate, subprime mortgages, and shadow banking; today, the more dangerous scenario is that high deficits push long-term bond supply higher and higher, making long rates impossible to push down, with bank unrealized losses, tail risks in commercial real estate, and liquidity dependence of risk assets gradually surfacing.

Therefore, once long-term rates can’t come down, the valuation foundation of this AI bull market in stocks begins to loosen.

This issue will become even more severe under Wosh’s leadership.

Why Wosh is a market warning sign

Because Wosh favors shrinking the balance sheet, which will further push up the 30-year Treasury yield and amplify stock market fragility.

What does this mean?

The Fed shrinking its balance sheet means reducing its assets and liabilities. Previously, to stimulate the economy, the Fed bought a lot of government bonds and mortgage-backed securities (MBS); these purchases injected liquidity into the market. Shrinking the balance sheet involves reducing these assets, gradually withdrawing liquidity.

In simple terms, if the Treasury issues new bonds or matures, and the Fed does not buy them—and might even sell holdings—these bonds will flow into the market, and interest rates will be determined by market forces, leading to continued rises in Treasury yields. This also increases the federal interest burden, which is dangerous for a system relying on issuing new debt to roll over old debt. If interest costs become unsustainable, a Treasury crisis could occur.

Former Treasury Secretary Paulson also warned that if U.S. Treasuries start losing market buyers, the entire financial system’s “risk-free anchor” will shake.

Given such serious consequences, why does Wosh favor shrinking the balance sheet? The answer lies in his background.

Wosh served as a Federal Reserve governor from 2006 to 2011, a period that is key to understanding his policy tendencies. He experienced the last credit expansion before the crisis, the 2008 global financial crisis, and the start of zero interest rates and QE (quantitative easing).

He is not someone who completely denies crisis intervention; on the contrary, during times of systemic risk, he supported the Fed acting as a lender of last resort and recognized the necessity of unconventional tools. But he increasingly questions whether long-term QE should persist after the crisis.

From his perspective, the U.S. economy has not recovered proportionally in asset prices. The real economy’s recovery is weak, productivity improvements are limited, but financial asset prices have rebounded rapidly under liquidity, even surpassing pre-crisis levels.

This leads Wosh to a typical judgment: QE may be good at boosting financial asset prices but not at restoring the real economy. Once markets default to “the Fed will ultimately backstop asset prices,” the financial system becomes increasingly dependent on liquidity, risk appetite remains suppressed, and bubbles and mismatches grow.

In his view, if the Fed maintains a large balance sheet and keeps long-term yields suppressed, the market will eventually become unable to operate independently of central bank liquidity. Shrinking the balance sheet, in his eyes, is not just withdrawing liquidity but actively exiting the role of “financial condition stabilizer.”

This is why Wosh is more inclined than Powell to push for QT (quantitative tightening).

Therefore, under Wosh’s leadership, high interest rates will become even more challenging, and the Fed may not act as swiftly to soothe markets as before. Once this expectation takes hold, the fragile high valuation of stocks will face even greater pressure.

AI narratives can’t digest high rates

Of course, maintaining high yields on the 30-year Treasury does not necessarily spell doom for stocks.

If the U.S. economy continues to outperform expectations, with earnings repeatedly revised upward, especially if AI can rapidly translate into widespread productivity gains, then even with high long-term rates, risk assets might still withstand the pressure. Ultimately, whether markets can digest high rates depends on economic growth itself.

Over the past year, the reason U.S. stocks, especially tech stocks, could keep rising amid high rates was largely based on optimistic assumptions: AI would significantly boost corporate earnings, raise productivity, and open a new growth cycle for the U.S. economy.

But the problem is, the current AI narrative mainly focuses on a few leading companies and capital markets, and has not yet been sufficiently proven to quickly and broadly improve the fundamentals of the entire economy.

Take Nvidia as an example. It has indeed generated astonishing returns and market imagination, but these companies share common features: high technological barriers, concentrated profits, limited employment absorption (by FY2026, Nvidia’s global workforce will be only 42k), and limited spillover effects on the broader economy.

In other words, AI can temporarily boost valuations of Nvidia, Microsoft, and similar firms, but may not be able to support broader employment, investment, and real-sector expansion in the same short period.

More realistically, the U.S. already faces issues like power shortages, infrastructure gaps, and industrial mismatches. Rapid expansion of the AI industry could further divert capital, energy, and talent toward top tech firms, exacerbating resource imbalances.

This is not to say AI is ineffective, but to emphasize that it has not yet reached a level sufficient to offset the valuation pressures caused by high long-term rates.

In other words, the market thinks it is trading AI, but in reality, it is still trading another thing: low long-term rates and Fed backstopping. As long as these two premises remain, high valuations can continue; once they loosen, AI’s strength will only delay revaluation, not prevent it.

Wosh is not a source of risk, but he might make this process harder to reverse.

In summary, although Wosh will not intentionally create a crisis, he might be the first to make the market truly accept that the high valuation logic supported by low long-term rates and Fed backstopping is no longer as stable as before.