The profit imagination fueled by AI agent expansion and the valuation pressure from rising long-term Treasury yields have become the two most prominent opposing forces on Wall Street, yet so far the answer from U.S. equity market capital flows has been clear — the unprecedented AI computing power expansion and AI application boom driven by AI agents are overpowering a series of significant bearish factors, including the climb in 10-year and longer-dated Treasury yields.
This has led some top Wall Street hedge funds to abandon the traditional 60/40 portfolio and shift toward a more aggressive 80/20 variant — roughly 80% of total ETF assets allocated to equity ETFs, approximately 16% to fixed-income ETFs focused on Treasury assets, with the remaining small share potentially in cash management assets similar to Treasury reverse repos, bringing the overall structure closer to 80/20.
The 10-year Treasury yield is known as the anchor of global asset pricing, stemming from its benchmark status in the dollar financing system and in the valuation of medium- to long-term cash flows. The U.S. Treasury market is massive and actively traded, and the dollar is widely used for international financing and reserves, giving its yield changes cross-market influence — dollar corporate bonds typically reference Treasuries of similar maturity plus a credit spread, mortgage rates are affected by Treasury and mortgage-backed securities pricing, and equity and real estate valuations are highly sensitive to the discount rate applied to future cash flows.
From a theoretical standpoint, the 10-year Treasury yield serves as the risk-free rate indicator r on the denominator side of the DCF valuation model, a key valuation tool in the stock market. When other indicators — particularly cash flow expectations on the numerator side — show no significant change, such as during earnings season when the numerator side lacks positive catalysts and enters a vacuum period, a higher denominator level or sustained operation in the historically extreme high range above 5% would put those AI-linked tech stocks, high-yield corporate bonds, and cryptocurrencies trading at historically elevated valuations at risk of a valuation collapse.
However, as AI skeptics once again declare surrender, traders bullish on the AI computing theme are actively exploring the future trajectory of tech stocks — primarily because risk assets have once again withstood yield pressure, reflecting investors' continued belief that AI application commercialization and corporate earnings growth can to some extent offset the impact of rising financing costs and discount rates.
The Nasdaq 100 index's journey to its first record high since June was anything but smooth. Now, the stock market bulls driving this rally are searching for bullish evidence that the upward momentum based on the unprecedented AI infrastructure boom will not fade. Wall Street financial giant Jefferies recently stated that, driven by the dual engines of the AI investment frenzy and AI-related corporate earnings beating expectations, the S&P 500 is projected to surge to 8,000 by the end of 2026 and further reach 9,000 in 2027. Jefferies' core logic is clear and compelling: in a cycle where AI-driven earnings growth exceeds the historical average by more than double, fighting the earnings trend is dangerous. Jefferies' 2026 baseline forecast of 8,000 for the S&P 500 is based on earnings per share (EPS) reaching $373 (35% year-over-year growth, well above the market consensus of 29%) and a price-to-earnings ratio of 21.5 times.
AI Earnings Expectations vs. High Yield Curve: Why U.S. Stocks Can Still Withstand Long-Dated Treasury Yield Pressure
For the week ending September 25, the Nasdaq 100 rose 3.3%, the largest weekly gain since early August, after having hit a record high by Tuesday's close; Meta surged nearly 13% for the week on the strength of its Muse outlook. Meanwhile, the 30-year Treasury yield touched approximately 5.53%, the highest since 2004, and Brent crude remained above $100 per barrel. Risk assets once again withstood the pressure, reflecting investors' continued belief that AI application commercialization and corporate earnings growth can to some extent offset the impact of rising financing costs and discount rates. However, Friday's oil price retreat relied on hopes for progress in U.S.-Iran negotiations, and the normalization of energy supply has not yet become a certainty.
Muse and OpenAI's GPT-6 Astra provide more concrete application pathways for this earnings expectation. Muse executes cross-application tasks through a dedicated cloud virtual machine and browser, and can continue working after the user closes the application; Astra strengthens computer operation, software engineering, and multi-step professional work capabilities. When AI can complete research, programming, shopping, and office workflows, the chargeable value extends from generating an answer to delivering a work product. From a business growth perspective, higher task success rates and lower completion costs are expected to drive enterprises and consumers to expand usage, thereby supporting growth expectations for subscriptions, usage-based payments, and related infrastructure revenue.
This application expansion's transmission to the computing power side involves a complete computing system: GPUs and other AI accelerators handle model computation, CPUs manage browsers, code execution, virtual machines, tool invocation, and task orchestration; model weights, context, and concurrent sessions increase high-speed memory demand, while task files, long-term memory, and tiered cache storage increase DRAM and enterprise SSD demand. Nvidia's engineering analysis also points out that CPU tool execution speed affects agent workflow throughput, and KV cache can be managed in tiers across GPU memory, CPU memory, and storage based on access requirements. This is why Wall Street giants like Goldman Sachs and Jefferies are bullish on the hardcore logic supporting continued U.S. equity earnings expansion under accelerated AI application penetration and the AI computing frenzy — significantly higher AI agent penetration rates are expected to simultaneously expand demand in core AI infrastructure areas including computing, memory, storage, and optical interconnect networks.
Stock Market Rebound Injects New Momentum into Wall Street's 80/20 Offensive-Defensive Allocation Shift
Wall Street has just experienced another week like this: bond yields hit multi-decade highs, oil prices remained above $100 per barrel, and the case for further Fed tightening became stronger. Yet risk assets once again withstood the pressure. Although the global bond selloff intensified for most of the week and inflation concerns returned to the market's focus, stock market closing levels remained not far from record highs, and corporate bond credit spreads stayed within controllable ranges. However, investors' confidence in AI-driven corporate earnings growth and economic resilience has at least temporarily suppressed these concerns, and holding stocks has continued to deliver returns.
News of a potential breakthrough between the U.S. and Iran that could lead to the opening of the Strait of Hormuz caused oil prices to retreat on Friday, helping the Nasdaq 100 rise 3.3% for the week, its largest weekly gain since early August. Meta Platforms stood out particularly, with its stock rising nearly 13% on the launch of its Muse AI tool. However, behind all this still lurks the shadow of weakening consumer confidence and lingering inflation risks. The latter dealt a heavy blow to U.S. Treasuries this week, which are typically one of the safe havens against stock market risk.
Some capital flowed into new defensive tools. So far in September, approximately $2.7 billion has flowed into the Schwab U.S. Dividend Equity ETF, putting it on track for a 10th consecutive month of net inflows; two large options income ETFs under JPMorgan together attracted about $800 million. The iShares Global Infrastructure ETF attracted another $150 million. Meanwhile, some fixed-income fund managers are maintaining allocations at the shorter end of the yield curve. These tools are not traditional bond substitutes. But with shorter-term bond yields approaching 5%, they offer some of the characteristics investors now seek: sustainable income without taking on long-duration risk.
Adrian Helfert, Chief Investment Officer at Westwood, which manages approximately $18 billion in assets, said: "Investors are actively scrutinizing that 40% in the traditional 60/40 portfolio. Through dividends or option income, I can get meaningful sustainable income without taking on that duration risk. So we have reduced the long-end risk in our portfolios." As shown in the chart above, the U.S. 30-year Treasury yield has risen to its highest level in more than two decades.
At least in the ETF space, the textbook 60/40 allocation already looks more like 80/20. According to Bloomberg Intelligence data, equity ETFs account for approximately 80% of all ETF assets, among the highest proportions on record, while fixed-income ETFs account for about 16%. This tilt stems largely from divergent asset performance and allocation shifts by large institutional investors, rather than a unanimous active choice by ordinary investors. Stocks have clearly outperformed bonds, and some new capital is still flowing in at ratios closer to traditional allocations. Regardless of intent, ETF investors' assets remain significantly skewed toward equities, despite speculation that the bond market could siphon money away from stocks as bond yields remain at levels unseen since the global financial crisis.
Seema Shah, Chief Global Strategist at Principal Asset Management, said: "If yields are rising because U.S. economic growth is stronger, then bonds' traditional diversification benefits may be less reliable, especially during periods when both growth and inflation expectations are rising. This is one reason investors are considering broader equity investment opportunities."
Dubbed "wealth destroyers" — as shown in the chart above, long-duration bond ETFs of 10 years and beyond have become investments that have dealt heavy losses to capital. Note: The long-duration bond ETF basket includes TLT, IEF, SPTL, TLH, VGLT, EDV, ZROZ, GOVI, XTEN, UTEN, SCHQ, XSVN, GOVZ, XTWY, UTWY, UTHY, TYA, BBLB, USIN, LLDR. Source: Baird Strategas.
Take Westwood's veteran analyst Helfert as an example. He believes that at current yield levels, bonds offer quite attractive income. But he is reluctant to take on significant duration pricing risk to obtain that income. He said: "Treasury yields are attractive — the 10-year yield is now clearly above 5%. But the speed of yield changes is alarming." This is because rapidly rising yields have quickly pushed down long-term bond prices. A basket of long-duration bond ETFs tracked by Baird Strategas has attracted approximately $224 billion in cumulative inflows since inception, but now holds only about $182 billion in assets, reflecting the impact of widespread market selling. Among the four categories tracked by Todd Sohn at the firm for this calculation, the long-duration category has caused the greatest damage to investor capital.
This week, the 30-year U.S. Treasury yield touched 5.53%, the highest since 2004; the 5-year Treasury yield broke above 5% for the first time since 2007. Brent crude rose above $106 per barrel, and bond market volatility surged. Meanwhile, the S&P 500 recorded its first winning week since the beginning of the month. Garrett Aird, Vice President of Investment Management Research at Northwestern Mutual Wealth Management, which manages $461 billion in assets, said his team has adjusted the fixed-income allocation in several 60/40 portfolios they manage. They have been increasing allocations to real estate investment trusts and so-called liquid alternative investments, which include managed futures, merger arbitrage, and long-short strategies. In an interview, he said: "Our entire approach to portfolio construction is to provide a bit more diversification in the fixed-income portion of the allocation. The most critical thing is to find strategies that provide uncorrelated sources of return — that is, finding strategies that are correlated with neither equities nor fixed income, which is essential."
The Capital Choice Behind 80/20: Retaining Equity Growth, Reassessing Long-Bond Defensive Logic
It is worth noting that stocks outperforming bonds inherently pushes up the equity asset proportion. The so-called shift toward an 80/20 portfolio on Wall Street includes both passive weight changes for asset managers and hedge funds caused by rising stock prices, as well as some institutions' active choice to reduce exposure to long-duration Treasury allocations. But there is no doubt that capital is searching for tools that can provide income without taking on substantial long-bond interest rate risk.
So far in September, the Schwab U.S. Dividend Equity ETF has attracted approximately $2.7 billion, two large options income ETFs under JPMorgan have together attracted about $800 million, and the iShares Global Infrastructure ETF has attracted about $150 million. Their common appeal lies in dividends, operating cash flow, or option premiums, but these income sources may still be accompanied by stock price declines; selling call options for income also typically means giving up some upside potential. The problem facing the allocation logic for 10-year and longer-dated long bonds is that duration remains high and continues to rise, and rapid yield increases cause more pronounced price losses in bond allocations, with coupon-level income unlikely to cover this impact in the short term.
Extrapolating from this, Wall Street asset management giants and hedge funds appear to be re-decomposing the three core functions that the traditional 60/40 stock-bond allocation serves: providing sustainable growth income, reducing volatility, and hedging against stock market swings. Some investment institutions are beginning to use shorter-term bonds to control interest rate sensitivity, pairing high-momentum AI-focused strategies with dividend and options strategies to supplement income, and seeking different sources of return through leveraged strategies such as managed futures; whether these tools can achieve diversification still depends on specific holdings and market conditions.
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