The Whash Storm is Coming

Produced by | Miaotou APP

Author | Ding Ping, Huxiao APP

Header Image | Visual China

Wells is not the storm itself, but he might make the market realize 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. AI has almost redefined the entire market’s risk appetite, and the S&P and Nasdaq have been pushed higher all the way.

But if you break down this 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 at 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 forward-earnings-dependent U.S. stock market, the longer the long-term rates stay high, the more fragile the valuation system becomes.

What’s more troubling is that this pressure may intensify.

On May 15, Federal Reserve Chair Powell, who has been in office for 8 years, officially stepped down, and Kevin Woor became the next Chair. Compared to Powell, Woor might be more tolerant of market pressure, more committed to shrinking the balance sheet, and less inclined to covertly support the financial markets.

Once long-term rates keep rising and the Fed no longer quickly calms the markets as before, the logic that once supported high valuations of U.S. stocks 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 moving in tandem with monetary policy.

Theoretically, when the central bank cuts rates, short-term rates decline directly. If the market believes rates will stay low in the future, long-term rates should also fall. But an unexpected situation has emerged: even if the Fed doesn’t 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 doesn’t believe U.S. long-term risks are decreasing, and thus demands higher risk premiums.

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

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

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

Latest data shows that the U.S. April CPI rose 3.8% year-over-year, hitting a nearly three-year high, with core CPI increasing to 2.8%. More complicated is that the risk of U.S.-Iran conflict has not truly eased, oil prices remain high, and concerns about imported inflation continue to strengthen. As long as inflation expectations can’t be fully subdued, long-term rates will find it hard to decline smoothly.

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

By October 2025, U.S. national debt has surpassed $38 trillion; in just five months, it broke through $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” situation—requiring continuous debt expansion to maintain the existing system’s stability.

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

On one side, the Treasury continues to increase debt issuance; on the other, foreign holdings are decreasing because 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. As supply increases and demand weakens, long-term rates become harder to suppress.

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 that slowly realizes earnings, but a highly concentrated market supported by a few leaders, extremely sensitive to discount rates.

If long-term rates stay high, the discounting of 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 to the limit.

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 above 5%, and the Nasdaq index fell about 10% over a few months. Investors still believed that if financial conditions worsened, the Fed would eventually send calming signals. But if Woor’s arrival begins to loosen that expectation, the market’s capacity to absorb the same long-term rate shocks will be entirely different.

Many compare today to 2007, but the real lesson isn’t just that interest rates were high then, but that the damage from high rates to the financial system was never an instant event. It was 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’s more dangerous risks include high fiscal deficits pushing long-term debt supply higher, persistent high long-term rates, bank unrealized losses, tail risks in commercial real estate, and liquidity dependence of risk assets—all gradually surfacing.

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

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

Why Woor warrants market caution?

Because Woor favors shrinking the balance sheet, which will further push up the 30-year Treasury yield and amplify the fragility of U.S. stocks.

How to understand this?

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 doesn’t buy them—or even sells its holdings—the new and maturing bonds will flow into the market, and market forces will determine interest rates. The result is a continued rise 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 U.S. Treasury Secretary Paulson also warned that if U.S. Treasuries start losing market buyers, the entire financial system’s “risk-free anchor” could shake.

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

Woor served as a Federal Reserve Board member from 2006 to 2011, a key period for judging his policy tendencies. He experienced the last credit expansion before the financial 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 a crisis.

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

This leads Woor to a typical judgment: QE may be good at boosting financial asset prices but not at restoring the real economy. If markets start to default to “the Fed will ultimately support asset prices,” then the financial system will become increasingly dependent on liquidity, risk appetite will be suppressed long-term, and bubbles and mismatches will worsen.

In his view, if the Fed maintains an oversized 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 about withdrawing liquidity but also about the Fed actively stepping back from its role as a “stability provider” of financial conditions.

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

So, under Woor’s leadership, high interest rates will become even more challenging, and the Fed may not act as swiftly to soothe markets as before. Once these expectations form, the fragile high-valuation system of U.S. stocks will face even greater pressure.

AI narratives can’t digest high rates either

Of course, maintaining high yields on the 30-year Treasury isn’t necessarily bearish for U.S. stocks.

If the U.S. economy continues to outperform expectations, with earnings constantly revised upward, especially if AI can rapidly translate into widespread productivity gains, then even with high long-term rates, risk assets might still hold up. Ultimately, what determines whether markets can digest high rates is economic growth itself.

Over the past year, the reason U.S. stocks, especially tech stocks, have continued to rise amid high rates is largely based on optimistic assumptions: AI will significantly boost earnings, increase productivity, and open a new growth cycle for the U.S. economy.

But the problem is, the current AI narrative mainly centers on a few leading companies and capital markets, and it has not yet been fully proven to quickly and broadly improve the macro 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 it may not be able to support broader employment, investment, and real-sector expansion in the same short timeframe.

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 isn’t to say AI isn’t effective, but to emphasize that it’s not yet strong enough to offset the valuation pressures caused by persistently high long-term rates.

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

Woor isn’t a source of risk, but he might be the one making this process harder to reverse.

In summary, although Woor won’t intentionally trigger a crisis, he might make the market truly accept that the high valuation logic supported by low long-term rates and Fed backing is no longer as stable.