AI shares bounce back on Wall Street, yet bond yields may dampen the rally

US equities wasted little time finding breathing room, as Monday's bounce looked reasonably solid following the prior week's drubbing of technology shares. The Nasdaq rose 1.1% on the day, reclaiming some of the ground handed back in last week's sharp decline, while the S&P 500 was up 0.4%.

It is, to be sure, a promising start to the week. Still, it is worth remembering how badly tech stocks performed last week even with Treasury yields coming down. That has clearly left investors wondering whether faltering breadth and momentum are finally becoming a problem, or whether the vast spending behind the AI boom is no longer enough to support stretched valuations.

Either way, I'd maintain that the bond market will have a major say in how everything unfolds.

The 10-year Treasury yield remains above 5%, ticking up overnight to 5.12%. For tech stocks, that is not a comfortable setting, because a "higher for longer" regime means investors must likely grow accustomed to interest rates staying elevated. As a result, future earnings become less valuable in today's terms and financing costs increase.

And even if bond yields give back a little, as they did last week, borrowing costs across the wider economy are still painfully high. That makes aggressive spending harder to justify, particularly for companies that lean heavily on debt.

So don't underestimate the bond market's influence on trading this week, despite the quieter stretch since the second half of last week. It will not take much to fan the flames and bring back the unease across markets.

Until the bond market calms down, I'd hesitate to treat this modest bounce as the beginning of another sustained AI rally.

Beyond that, keep a close watch on key tech earnings this week. My focus is on Meta, and not simply for the headline numbers and financial results. What I'm really watching is whether the heavy AI investment is beginning to produce meaningful returns.