AI-Led Rally Faces Pressure From Rising Treasury Yields

The Nasdaq 100 hit a record Friday even as long-term Treasury yields climbed to levels last seen in 2002. The index was up 22% this year, with investors continuing to buy major technology stocks despite rising borrowing costs.

Last week, the 10-year Treasury yield topped 5.3%, while the long-bond yield reached 5.69%. The S&P 500 was less than 1% below its August record. Microsoft, Nvidia and Apple were the largest contributors to gains in both indexes over the prior three months.

Earnings expectations

Investors are counting on strong results from the technology companies that have powered much of the market’s growth. Third-quarter earnings per share for the sector are expected to rise more than 65%, according to Bloomberg Intelligence. That would help lift S&P 500 earnings per share by more than 24%, its forecast showed.

AI investment has also supported a cycle of gains for both the companies spending on infrastructure and suppliers benefiting from that spending. But investors have questioned when those investments will deliver returns, while the article also cites inflation, oil prices and the war in Iran as sources of uncertainty.

Spending and borrowing

The funding picture has shifted as AI infrastructure spending has grown. Alphabet, Amazon and Meta have each seen annual free cash flow turn negative, and Bloomberg Intelligence analyst Robert Schiffman said major technology companies’ cash needs now exceed internal sources.

Schiffman said the companies were turning to debt markets, which he expects to drive leverage higher over the next two years. He added that credit ratings had not yet been hurt, as expectations for EBITDA growth continued to offset higher leverage.

Risks beneath the surface

Higher yields have weighed on broader market valuations. The S&P 500 traded at less than 19 times forward earnings, down from more than 21 in May, according to the article.

Market strategist Chris Galipeau said a 10-year yield reaching 6% would change the discussion. Investors are also watching whether oil prices fall if the war in Iran ends. Ken Mahoney said a technology correction could lead to broader market losses, while Principal Asset Management strategist Magdalena Ocampo cited greater perceived upside risk to inflation and downside risk to growth.