These two developments can stop US stocks relentless surge in 2026

• US national debt is nearing $40 trillion and could reach $50 trillion by 2029, with the federal government recording a $432.3 billion deficit in July, the largest monthly shortfall since March 2021
• The 30-year Treasury bond auction yielded 5.216%, the highest since 2001, creating an uncomfortable backdrop for stocks at record valuations and particularly threatening growth and tech stocks dependent on future earnings
• Higher Treasury yields increase the opportunity cost of holding stocks versus low-risk government debt while raising discount rates on corporate earnings, potentially compressing valuations even if earnings remain healthy

Summary

Market Performance: US stocks have surged in 2026, with the S&P 500 reaching a record 7,798.99 on Thursday, marking approximately 14% gains year-to-date. The Nasdaq and Russell 2000 also hit new highs.

Key Threats Identified: Bank of America strategist Michael Hartnett warns two factors could halt the rally:

1. Exploding National Debt: US debt is approaching $40 trillion and could reach $50 trillion by 2029. July's federal deficit hit $432.3 billion—the largest monthly shortfall since March 2021. The Congressional Budget Office estimates fiscal 2026's nine-month deficit reached approximately $1.4 trillion, with Medicare spending and rising interest costs as major contributors.

1. Elevated Treasury Yields: Long-term borrowing costs remain stubbornly high despite cooling inflation. Thursday's 30-year Treasury bond auction yielded 5.216%—the highest since 2001. Higher yields make government debt more attractive relative to stocks and increase discount rates on future corporate earnings, particularly impacting growth and technology stocks.

Market Implications: While investors currently overlook these risks, focusing on AI optimism and stable monetary policy expectations, the combination of rising borrowing costs and expanding debt could compress stock valuations. Inflation-adjusted borrowing costs have reached decade-highs across major economies. The current "Anything but Bonds" and "all-in AI" sentiment supports continued gains, but persistently high yields could shift risk calculations and challenge record valuations, especially for high-multiple growth stocks.

Near-term Outlook: July producer-price data showing no monthly increase reinforced expectations the Federal Reserve may avoid further rate hikes, supporting the current rally despite underlying fiscal concerns.