Rising Bond Yields Deflate AI Investment Bubble

Rising government bond yields are exerting downward pressure on stock valuations, contributing to a gradual deflation of the artificial intelligence investment bubble. Yields on 10-year Treasurys recently reached 19-year highs, fueled by investor concerns regarding increasing government debt, higher oil prices, and sticky inflation.

Neuberger Berman and Morgan Stanley data indicate that this shift has resulted in an orderly pullback rather than a price crash, as strong corporate earnings growth has outpaced stock price increases. The S&P 500 forward price-to-earnings ratio declined from 22.9 last October to 19.09, while the forward PE ratio for the Magnificent Seven stocks dropped from approximately 33 to 23. Despite these corrections, the S&P 500 has risen 12.8% since its forward PE peak last October.

The BlackRock Investment Institute maintains an overweight rating for US and AI stocks, citing earnings growth and current valuations. However, the institute notes that the environment for risk has changed as rates reset higher, making the durability of earnings a more critical factor for investors.