Bank of America says rising bond yields aren't derailing the AI trade yet despite investor concerns

Bank of America Dismisses Rate Concerns for AI Trade

Bank of America has reassured investors that rising bond yields would need to climb substantially higher before posing a genuine threat to the AI trade, despite growing market anxiety over stretched valuations1

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. The bank's equity-linked analyst Benjamin Bowler told clients that macroeconomic forces face significant hurdles in derailing the AI-driven rally in technology stocks, even with long-term bond yields at multi-year highs2

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AI-Sector Profits Outpacing Stock Price Gains

The core of Bank of America's confidence stems from a critical observation: AI-sector profits have been rising fast enough to stay ahead of stock-price gains, creating a dynamic that has compressed rather than inflated valuation multiples1

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. This compression reduces the sector's vulnerability to rising interest rates, which typically weigh on growth stocks by increasing discount rates applied to future earnings. Bowler noted that technology earnings are currently outstripping share prices, causing the core of U.S. AI names to de-rate2

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Bubble Risk Indicator Remains Subdued

Bank of America's proprietary bubble risk indicator provides additional reassurance, with readings leaving analysts sanguine about U.S. equities1

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. The indicator remains subdued for the broader Nasdaq, suggesting AI euphoria has not yet reached bubble territory despite climbing global bond yields2

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. The bank maintains that any near-term sell-off would prove short-lived, with equities expected to bounce hard from any pullback.

Historical Parallels to Dot-Com Era

Bowler drew parallels to the late 1990s tech euphoria, noting that history suggests macroeconomic headwinds struggle to disrupt such rallies. U.S. 30-year yields rose 200 basis points and the Federal Reserve hiked more than 100 basis points while the Nasdaq soared during that period2

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. Middle East tensions have also failed to temper enthusiasm for the AI boom so far.

Cautious Optimism Amid Volatility Concerns

While Bank of America remains confident about the AI trade's resilience, analysts acknowledge that rising rates, sticky inflation, fiscal concerns, and potential Federal Reserve policy changes have investors on edge heading into a seasonally volatile stretch2

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. Bowler emphasized that this confidence doesn't mean investors should avoid protection, noting that volatility markets look cheap because they don't yet appear concerned about the risks posed by rising interest rates. However, he cautioned that rapid recoveries from dips remain one of the most telling signs of a bubble building, suggesting investors should view rebounds cautiously even as they capitalize on pullback opportunities2

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