The S&P 500 Keeps Hitting Records. Bank of America Warns of Two Risks That Could End the Rally.

The U.S. stock market keeps hitting records, but a Bank of America strategist says surging government debt and persistently higher Treasury yields could end up threatening the rally.

The S&P 500 climbed to new records last week, crossing 7,800 for the first time. The latest milestone extends a powerful bull market that has continued despite geopolitical uncertainty and concerns about government finances.

The rally has also broadened beyond the technology and artificial intelligence stocks that have dominated much of the market's recent gains. Energy stocks led this week's advance, with the sector rising nearly 6% through Thursday's close. Healthcare and financial stocks each gained more than 1%.

That strength has helped reinforce the sense on Wall Street that relatively little can derail equities. But Bank of America strategist Michael Hartnett identified two potential obstacles that investors may no longer be able to ignore if current trends continue.

The first is America's rapidly expanding national debt. The U.S. budget deficit reached $432.3 billion in July, its largest monthly shortfall in more than five years, with rising Medicare costs contributing to the increase. Hartnett said the national debt is on the verge of surpassing $40 trillion and is on course to reach $50 trillion by 2029.

The second threat, rising bond yields, is closely connected to the first. The yield on the 30-year Treasury hovered around 5.24% Friday, near levels not seen in more than a decade. Thursday's auction of 30-year Treasury bonds produced the highest yield since 2001, underscoring the pressure in the government debt market.

Higher Treasury yields can become a problem for stocks because they raise borrowing costs throughout the economy while making bonds and other fixed-income investments more competitive with equities. If investors can earn increasingly attractive returns from relatively safer government securities, the valuations they are willing to pay for stocks can come under pressure.

The situation could become more complicated if energy prices remain elevated because of the ongoing war in the Middle East. Higher energy costs can contribute to inflationary pressure, potentially keeping interest rates and Treasury yields elevated for longer.

For now, however, investors appear willing to look past those risks. Hartnett described several investment "rules of the road" that have characterized markets in the 2020s, including "Anything but Bonds," "Anywhere but China," "Anything but the US Dollar" and an "all-in on AI" mentality.

Those trends, he said, have been reinforced in 2026 by investor conviction that policymakers see a boom in nominal gross domestic product as a potential solution to the country's indebtedness and regard the stock market as "too big to fail." That belief, Hartnett argued, helps explain why Wall Street continues to trade with little apparent fear.

Artificial intelligence has been particularly important to that confidence, with investors continuing to pour money into companies positioned to benefit from spending on AI infrastructure, computing and related technologies. But the bond market could ultimately test that optimism. A national debt moving toward $40 trillion is one challenge. Long-term Treasury yields remaining above 5%, or climbing further, is another.