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The market is pricing in an 87% probability that the Fed will cut interest rates by 25 basis points on Wednesday. But the benchmark 10-year Treasury yield has risen sharply over the last week. What gives?

Contrary to many people’s understanding, the Fed does not control interest rates. The Fed controls the Federal Funds rate while the market sets the rate for Treasuries, Corporate Debt, Mortgages, etc. Certainly, the two usually move together, but not always. Why not?

In this case, I believe the market is concerned that the Fed is overstimulating which could result in sticky inflation or worse. Because inflation eats away at the purchasing power of money, bondholders need to incorporate a component for inflation in figuring out the interest rate they are willing to accept on a bond. If they are concerned that inflation is sticky or rising, that component increases and therefore so will the interest rate.

This makes the reaction to the coming Fed cut on Wednesday the thing to focus on. It is possible that the Fed will cut but the 10-year Treasury yield will rise for the reason stated in the previous paragraph. A higher “risk free” rate means that stocks – especially growth stocks which in the current market means primarily Tech – should see their valuations compress based on the Discounted Cash Flow model.
 

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This comes at a time when the market looks vulnerable. The average stock in the S&P 500 as represented by the Equal Weight S&P 500 ETF (RSP), has gone nowhere for two months. The market is being carried by a very thin group of stocks – primarily the Magnificent 8. (Broadcom (AVGO) is now bigger than Facebook (META) and Tesla (TSLA) and its stock is on fire so it deserves to be included here).
 

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Indeed, many previous leaders are breaking down. Let me give you two examples: Autozone (AZO) and Costco (COST). These are two great companies but their valuations became excessive and their stock prices have come off notably of late.

AZO just reported 1QFY26 earnings and is down almost 2% in the premarket as their Operating Margin compressed by 280 basis points compared to the year ago period for some reason which caused EPS to decline 4.5% despite excellent Domestic Comps of +4.8%. COST reports earnings Thursday afternoon – as does AVGO.
 

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