S&P 500 Rally Challenged by Rising Yields

Wall Street Caught Between AI and Macro Risks

The rally in US equities has remained remarkably resilient since late March, but the macro backdrop is becoming increasingly difficult to ignore. The S&P 500 has rallied for seven consecutive weeks without a pull back, staying in overbought territory for several weeks now.

One critical factor that has been supporting the rally was earnings. The latest reporting season has generally been strong across several key sectors, including technology, industrials, financials, consumer discretionary, and AI infrastructure.

Investors are now facing a more complicated environment where artificial intelligence-driven earnings optimism collides with surging bond yields, elevated oil prices, and intensifying geopolitical risks in the Middle East.

At the centre of this week’s market focus is Nvidia, the final major mega-cap technology company to report earnings this season. Its results could determine whether the AI-led rally still has enough momentum to extend further or whether markets are approaching the point where macroeconomic pressures finally overwhelm earnings strength.

The S&P 500 Rally Faces Its Toughest Test Yet

Equity markets have managed to rally sharply throughout April and May despite persistent concerns surrounding inflation, fiscal deficits, and geopolitical instability. The dominant force behind the advance has been the AI trade, particularly semiconductors and hyperscaler infrastructure spending.

That enthusiasm has helped drive the Philadelphia Semiconductor Index more than 70% higher from its March low, while Nvidia itself has rallied more than 43% over the same period. However, market leadership has narrowed considerably. A small handful of mega-cap technology companies now account for the majority of the S&P 500’s gains this year, leaving the broader market increasingly dependent on continued AI momentum.

This concentration is raising concerns as the macro environment is no longer as supportive as it was earlier in the cycle. Rising bond yields are beginning to pressure valuations, while Brent prices above $110 per barrel threaten to reignite inflation concerns globally.

The market now faces a difficult balancing act. Investors still believe AI can continue to grow earnings, but they are simultaneously confronting the possibility that higher inflation and tighter monetary policy could reduce the valuation multiples investors are willing to pay for future growth.

Markets are now entering a phase where earnings growth alone may no longer be sufficient to justify the hefty valuations. The next stage of the rally likely requires broader participation beyond a narrow group of mega-cap technology stocks.

Nvidia Earnings Unlikely to Sustain the AI Stock Rally

NVIDIA is set to report its fiscal Q1 2027 earnings after the U.S. market closes on the 20th of May, with expectations of another standout quarter fuelled by continued demand for AI infrastructure. Wall Street forecasts revenue of around $79 billion and adjusted earnings per share of roughly $1.81, implying year-over-year growth of 82% in revenue and 135% in earnings. Despite already being valued at more than $5 trillion, investor expectations remain extremely high.

A major focus of the earnings call will be China. While Nvidia has reportedly secured approval to supply its H200 chips to major Chinese technology firms such as Alibaba, Tencent, and ByteDance, the company has not yet recognized any related revenue. Current guidance assumes no contribution from China’s data centre business this quarter, making management’s comments on delivery timelines and U.S. government revenue-sharing policies particularly important for investors.

Markets will also closely watch Nvidia’s outlook for Q2. Analysts are expecting guidance of approximately $87.2 billion in revenue, and anything below that could raise concerns about slowing growth, even if first-quarter results beat expectations.

The challenge is no longer proving that AI demand exists. Investors already understand Nvidia’s dominant positioning. The key question now is whether demand growth can remain strong enough to offset mounting macro pressures, including rising memory and copper costs, higher energy prices, supply chain constraints, China-related uncertainty following the Trump-Xi summit, and increasing pressure on hyperscaler capital expenditure budgets.

Despite consistently beating earnings expectations, Nvidia shares have actually declined following each of its last three earnings releases. Expectations have simply become extraordinarily high. Given that Nvidia shares have risen around 43% from its March low, any disappointment would likely trigger a pull back in the short-term.

The earnings release also marks the conclusion of the reporting season for the broader “Magnificent Seven” technology group.

Rising Yields Put Pressure on Stocks

While earnings remain strong, the bond market is becoming the biggest challenge for equities. The U.S. 10-year Treasury yield has climbed above 4.6%, while the 30-year yield recently touched its highest level since 2023.

The problem for equities is straightforward. Higher yields increase the discount rate applied to future earnings, which disproportionately affects growth sectors such as technology and semiconductors.

Historically, markets have tolerated expensive valuations during periods of low and stable rates, but that changes when inflation expectations begin rising again.

The front end of the Treasury curve is also sending a more hawkish signal. Markets are pricing the possibility that the Federal Reserve may need to keep policy tighter for longer, with the risk of another rate hike next year rising.

That represents a major change from earlier in the year, when expectations centred around rate cuts. The concern now is that the equity market may struggle to maintain current valuation multiples if yields continue climbing.

The US-Iran War Is Reigniting Inflation Fears

The geopolitical backdrop has become another major source of uncertainty for investors.

The war in Iran is in its third month despite ongoing diplomatic efforts. Peace negotiations stalled and both sides remain far apart on critical conditions surrounding sanctions, nuclear activity, and regional security.

The risk of renewed direct conflict remains elevated, particularly as both Washington and Tehran appear unwilling to compromise on key demands.

Markets are focusing heavily on the potential implications for global energy supply, particularly through the Strait of Hormuz, one of the world’s most important oil transit routes.

That risk has already pushed Brent crude above $110 per barrel, from $60 at the beginning of the year. The rise in oil prices increased inflationary pressure globally, raised transportation and manufacturing costs, reduced consumer spending power, complicated central bank policy decisions, and pushed bond yields higher globally.

This creates a dangerous combination for risk assets. Markets can usually tolerate one macro headwind at a time. But at present the market is dealing with elevated inflation, higher interest rates, rising bond yields and geopolitical instability simultaneously.

The longer oil remains elevated, the greater the risk that inflation expectations become embedded again across developed economies.

Source: TradingView. S&P 500 daily price chart as of 20 May 2026.

Can The S&P 500 Rally Extend Further?

The answer likely depends on what happens from here to bond yields, oil prices, and geopolitical instability in the Middle East at the same time. If oil prices stabilize and Treasury yields stop climbing aggressively, the S&P 500 could still push toward 7,900 into year-end, particularly if Nvidia delivers another strong earnings report and AI investment trends remain intact.

Economic growth has remained relatively resilient, corporate earnings continue surprising to the upside, and investor positioning remains bullish. While there are still reasons for optimism, cracks are beginning to emerge. The rally has become increasingly concentrated, semiconductor valuations are elevated relative to historical averages, and bond markets are signalling growing discomfort with inflation risks.

This does not necessarily mean the long-term bull market is over. But it does suggest that the easy phase of the rally may now be behind us and that the S&P 500 is vulnerable to a pull back to 7,000 in the short-term.

For now, Wall Street remains caught between two competing drives: massive technological optimism and a rapidly deteriorating macro backdrop. Nvidia’s earnings this week may determine which story dominates markets heading into the second half of the year.

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