Wall Street’s focus on artificial intelligence (AI) continues to drive technology stocks higher, even as rising interest rates and other risks weigh on the broader market. Despite yields on long-term U.S. Treasury bonds nearing their highest levels in more than two decades, investors remain bullish on major tech companies, pushing key equity indexes to or near record highs.
Last week, yields on the 30-year Treasury hit 5.69%, while the 10-year Treasury yield surpassed 5.3%, levels not seen since 2002. Yet the Nasdaq 100 Index reached a fresh record, climbing 22% so far this year. The S&P 500 Index remains just shy of its all-time peak reached in August. Gains over the past three months have been largely powered by AI leaders Microsoft Corp, Nvidia Corp, and Apple Inc.
Industry experts note that investors are banking heavily on strong third-quarter earnings from the technology sector, with earnings per share expected to rise by more than 65%—second only to energy. This comes amid forecasts that the S&P 500 companies overall will see earnings climb by roughly 24% for the quarter, marking a third consecutive quarter of robust growth.
The rally in AI-driven stocks reflects billions of dollars in capital expenditures as companies build the infrastructure needed to advance AI technologies. This spending spree benefits not only the top tech firms but also chip manufacturers and data center operators, creating an interconnected boost to various segments of the market.
Still, concerns persist. The market is grappling with geopolitical tensions, notably the ongoing conflict in Iran, alongside persistent inflation driven by elevated oil prices. The Federal Reserve is also expected to raise interest rates once more before year-end. These factors have contributed to a volatile trading environment, with investors rotating between software and hardware stocks and focusing on the so-called Magnificent Seven tech giants that have regained momentum since mid-year.
Higher interest rates present a growing challenge. While large tech firms previously benefited from strong balance sheets and low debt—allowing them to absorb rising borrowing costs—many now face increased capital needs to fund expanding AI projects. Companies such as Alphabet Inc, Amazon.com Inc, and Meta Platforms Inc have moved from free cash flow positive to negative territory, prompting increased issuance of debt.
Despite higher leverage, credit ratings for these hyperscalers remain intact, supported by strong earnings growth expectations, according to analysts. Nonetheless, elevated yields have contributed to some valuation pressures, with the S&P 500’s forward price-to-earnings multiple contracting from above 21 in May to under 19 currently.
Market strategists caution that the market’s underlying strength could be fragile. Should technology stocks falter, the overall market might face significant headwinds given their outsized influence. Currently, the outlook depends partly on geopolitical developments; a resolution of conflict in Iran could ease oil prices and inflation, potentially bolstering tech earnings. However, experts warn that a swift drop in oil prices following the conclusion of hostilities is uncertain, prolonging inflation risks.
Investors remain optimistic but vigilant in the face of these offsetting forces. While growth remains supported by technology-related activity, there is a cautious recognition of rising inflation risks and potential slowing in economic growth. This complex interplay of factors contributes to an environment of carefully measured optimism on Wall Street.