By Vildana Hajric and Lu Wang The AI-fueled resilience of the world’s most-watched stock indexes is masking a widening retreat across financial markets, as elevated oil prices and borrowing costs take their toll.

Yields on 10-year US Treasuries approached 5.4% this week, their highest since 2002 as Brent crude hovered above $100 a barrel, stoking fears of a prolonged inflation shock. The price of money is rising across much of the world, sending UK borrowing costs to a 19-year high and adding to the pressure on French government debt.

For all the turmoil, the big equity benchmarks have proved resilient. The S&P 500 hit a record on Tuesday, stumbled over the next two sessions amid fears over AI demand, then bounced back Friday as traders looked ahead to another bumper earnings season. It remains within striking distance of its peak.

Enduring economic growth is allowing investors to look past rising yields and geopolitical upheaval. But the market’s ability to absorb the shock depends heavily on where investors are looking. Barely a third of S&P 500 members are trading above their 50-day moving averages, a widely watched gauge of near-term breadth. The picture is even starker for the interest-rate-sensitive Russell 2000, where just 27% of its small-cap constituents are above that threshold.

Bonds issued by the weakest borrowers yield about 15%, a punishing hurdle for companies that need to refinance. US high-yield corporate spreads have widened in recent days, and a junk-bond ETF has dropped to around its lowest levels since last spring’s tariff-war-fueled selloff.

The landscape for new equity listings is feeling the chill, with a clutch of high-profile delays that NYSE Group President Lynn Martin has attributed to higher interest rates.

“The cap-weighted S&P 500 is masking a lot of the damage happening beneath the surface,” said James St. Aubin, chief investment officer at Ocean Park Asset Management. “The bond market is effectively imposing tighter financial conditions even without help from the Fed. The risk is that what began as an energy shock eventually becomes an earnings problem, and the equity market has yet to fully price that possibility.”

For now, the rate shock is spurring investors to reshuffle portfolios rather than triggering a wholesale flight from risk. Investors are peeling back positions vulnerable to volatile bond yields and expensive financing, from speculative credit to currency carry trades.

The Russell 2000 notched its fifth straight weekly loss, down roughly 8.5% from its high and nearing correction territory, while real estate stocks endured an extended losing streak. By contrast, the S&P 500 and tech-heavy Nasdaq 100 both climbed.

Thursday’s selloff in chipmakers showed that even the AI trade isn’t immune to a wobble in confidence. How much longer the big indexes can withstand the pressure may also come down to what happens next in oil and bonds.

A scenario combining a continued drain on megacap tech’s cash flow with a 6% yield on 10-year Treasuries and oil at $150 a barrel could send the S&P 500 down more than 20% next year, according to Societe Generale strategists Manish Kabra, Charles de Boissezon and Kawtar Mamouni. A retreat in yields toward 4% and oil to $80 alongside with improved fundamentals by big tech, by contrast, would leave room for further gains, they wrote in a recent note.

“5% yield creates valuation headwind but at 6% we should see a credit event” that is more likely to occur outside the private sector where the most leveraged balance sheets exist, Kabra said in an interview. “All questions are currently on the fiscal stability and debt sustainability of sovereigns.”Ocean Park’s St. Aubin says his firm’s internal models have flagged downtrends in several investments exposed to higher rates, prompting his team to cut exposure to credit-sensitive assets, including high-yield debt, as spreads widen.

He calls below-investment-grade credit spreads “the true barometer of fear,” making the widening since mid-September particularly unsettling.

The S&P 500’s all-time high arrived with unprecedentedly thin breadth. With only 30% of the index’s members trading above their 50-day moving average, the participation was the weakest among all record days since Bloomberg data began in 1990.

Others aren’t waiting for the squeeze to reach the stock market’s winners. Jeff Muhlenkamp, whose $270 million fund has beaten the S&P 500 this year, has increased its energy holdings and sold almost all its AI-related stakes.

“I’m happy to leave the party while it is still in full swing,” he said, referring to the frenzy over the technology. “Financing is still available. When that is exhausted it will be game over.”