(Bloomberg) — Wall Street’s artificial intelligence fixation is so strong that it’s overwhelming all risks, including soaring interest rates, as investors continue to plow money into the market’s largest technology stocks and push equity indexes toward record highs.
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But even with all the euphoria, the risks looming on the horizon are becoming acute, particularly as yields on long-term Treasuries trade near their highest levels in decades.
“With these higher rates, all of us are on edge,” said Ken Mahoney, chief executive officer of Mahoney Asset Management.
Just last week, the long bond yield reached 5.69% and the 10-year rate topped 5.3%, something neither has done since 2002. But tech stocks have still managed to hold onto their gains. The Nasdaq 100 Index hit a fresh record on Friday and is up 22% this year, while the S&P 500 Index is less than 1% from the all-time high it reached in August. The largest point contributors to the S&P 500’s and tech-heavy Nasdaq 100’s gains over the last three months are AI giants Microsoft Corp., Nvidia Corp. and Apple Inc.
“I would’ve said 5% was the limit, but you know, that’s kind of in the rearview mirror already,” said Matt Stucky, chief portfolio manager at Northwestern Mutual.
Investors’ confidence in the durability of this rally largely rests on sky-high expectations for upcoming earnings from the tech giants that have driven the lion’s share of growth over the last few years.
Third-quarter earnings per share for the sector are expected to jump more than 65%, giving the group the second-fastest growth after energy, to help fuel the more than 24% rise in EPS anticipated for S&P 500 companies, according to Bloomberg Intelligence. If that happens, it will be the third straight quarter when the index’s EPS has climbed more than 20%.
“It’s hard to even put that in perspective,” said Rob Conzo, chief executive officer of the Wealth Alliance. “It’s historic.”
AI has been the primary driver of gains in the stock market — and technology shares in particular — over the last three years, as companies spend hundreds of billions of dollars to build out the infrastructure needed to power the nascent technology. Those capital expenditures have created a virtuous circle for investors where the behemoths doing the spending rally because they’re making progress on AI, and the recipients of all that cash, from chipmakers to data center construction companies, also climb as their revenues take off.
