US stocks have been charging higher with remarkably little resistance in 2026, repeatedly shrugging off inflation worries, geopolitical risks and elevated borrowing costs.
The benchmark S&P 500 index climbed above 7,800 for the first time intraday on Thursday before finishing at a record 7,798.99, extending a rally that has pushed the benchmark roughly 14% higher year to date.
Yet Bank of America strategist Michael Hartnett sees two increasingly important threats that could eventually challenge Wall Street’s seemingly unstoppable advance: an exploding US national debt burden and persistently high Treasury yields.
Neither has derailed stocks so far, but both are becoming harder for investors to ignore.
A US debt burden approaching $40 trillion
The first threat is the sheer scale of US government borrowing. The national debt is on the verge of crossing $40 trillion, with Hartnett warning that it could reach $50 trillion by 2029.
The speed and cost of that accumulation matter for stocks because increasingly large interest payments can consume government resources while forcing the Treasury to keep issuing enormous amounts of debt.
The latest fiscal figures offer little reassurance. The federal government recorded a $432.3 billion deficit in July, its largest monthly shortfall since March 2021. Medicare spending was among the major contributors, while rising interest costs added to the pressure.
The Congressional Budget Office had already estimated that the federal deficit reached roughly $1.4 trillion during the first nine months of fiscal 2026.
For stocks, the concern is less about the debt number itself than what it could eventually do to inflation, interest rates and investor confidence.
Treasury yields are becoming a bigger problem
The second threat is the rising cost of borrowing. Long-term Treasury yields have remained stubbornly high even as recent inflation data have reduced expectations for another immediate Federal Reserve rate increase.
On Thursday, the Treasury sold $25 billion of 30-year bonds at a 5.216% yield – the highest rate at a 30-year auction since 2001. That is an uncomfortable backdrop for stocks trading near record valuations.
Higher Treasury yields increase the return investors can obtain from relatively low-risk government debt while simultaneously raising the discount rate applied to future corporate earnings.
That can be particularly painful for growth and technology stocks, whose valuations depend heavily on profits expected years into the future.
The problem could become even more pronounced if heavy government borrowing keeps long-term yields elevated regardless of what the Fed does with short-term rates.
Reuters reported Friday that inflation-adjusted borrowing costs have reached their highest levels in more than a decade across major economies, highlighting how broader bond-market pressures are emerging alongside government and corporate investment.
Can debt and yields really break the rally?
For now, investors appear willing to look past both risks. Thursday’s record close came after July producer-price data showed no monthly increase, helping reinforce expectations that the Federal Reserve may avoid another rate hike in the near term.
The Nasdaq also reached a record, while the Dow and Russell 2000 advanced.
Hartnett’s broader argument is that investors have few attractive alternatives to US stocks. His description of the current environment, “Anything but Bonds,” “Anywhere but China,” “Anything but the US Dollar,” and an all-in approach to AI, captures why stocks can continue climbing despite uncomfortable fiscal and bond-market signals.
But that logic has a limit. If Treasury yields rise far enough, the opportunity cost of owning stocks becomes harder to ignore.
At the same time, a rapidly expanding debt load could make investors demand an even larger premium for holding US assets. That combination could compress stock-market valuations even if corporate earnings remain healthy.
The immediate threat, therefore, is not necessarily a sudden fiscal crisis. It is a gradual shift in the market’s calculation of risk. As long as earnings, AI optimism, and expectations for stable monetary policy overpower concerns about debt and yields, the bull market can keep running.
But if borrowing costs continue climbing while Washington’s debt trajectory worsens, the two forces Hartnett has identified could finally give Wall Street’s relentless rally a serious obstacle.
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