As we move into 2025, a potential bearish scenario looms over financial markets, driven by rising inflation and an increasing interest rate environment. If inflation continues to surge, central banks may be compelled to raise interest rates further. In such a case, the yield on 10-year bonds could reach 5%, marking a significant turning point with negative implications for the stock market.

The U.S. stock market requires a more detailed analysis. However, in general, technological advancements have played a crucial role in sustaining market strength over recent years, leading to high stock valuations. If the anticipated productivity gains from technology, particularly AI, fail to materialize as expected, we might witness a repeat of the dot-com bubble. Nevertheless, as of now, financial reports do not indicate any major red flags, and investors remain optimistic about AI-driven productivity gains.

The impact of rising interest rates extends beyond bond yields, influencing key market indices like the Nasdaq and Dow Jones. When the yield on 10-year bonds surpasses 4%, borrowing costs for businesses rise, increasing financial strain. Companies that rely heavily on debt for expansion and growth, particularly in the tech sector, are more vulnerable to these rate hikes. Consequently, the Nasdaq, which houses numerous high-growth technology firms, tends to be more sensitive to such changes than the Dow Jones, which includes more established, mature financial institutions.