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AI Trade Threat: Pro Insights
Rising bond yields are pressuring the AI trade as the 30-year U.S. Treasury yield hit a 19-year high above 5.33%, raising concerns that higher borrowing costs could hamper the massive artificial intelligence data center buildout and tech stock valuations. The surge in global yields, including Japan's 10-year bond reaching three-decade highs and European benchmarks hitting multi-year peaks, stems from persistent inflation worries and the growing U.S. debt load, threatening the profitability of AI infrastructure investments that have driven stock market gains. Investors fear elevated interest rates will discount the future earnings of AI companies, particularly as hyperscalers shift from using existing capital to relying on debt markets for funding data center projects. According to Matthew Bartolini at State Street Investment Management, rising rates increase the discount rate on future growth, potentially impairing longer-duration growth equities. Gil Luria of D.A. Davidson noted that while megacap firms like Microsoft and Amazon may be insulated by diversified businesses, debt-heavy players such as CoreWeave and Oracle face existential threats, as higher interest costs could derail their expansion plans. The market reaction was immediate, with the Nasdaq Composite sliding 1.3%, the VanEck Semiconductor ETF (SMH) dropping 4.1%, and AI-focused ETFs like CHAT and AIQ suffering significant losses. However, Ned Davis Research's Joe Kalish suggests a single 25-basis-point hike may not derail financing efforts, noting current rate levels remain below historical bubble peaks. Ultimately, as Bartolini emphasized, the sustainability of the AI trade hinges on whether rapid earnings growth can offset the headwinds from higher rates, rather than an imminent bubble burst.