Bond sell-off threatens to knock AI stock frenzy off course

INVESTORS are fervently chasing the hot rally in tech and AI stocks while widely acknowledging that rising yields threaten to knock equities off course.

The assessments from Bloomberg News interviews with 32 investment managers across the US, Asia and Europe, including at Wells Fargo Investment Institute, Amundi and BMO Global Asset Management, were overwhelmingly bullish. Investors are particularly upbeat about equities, with 80 per cent expecting them to outperform other asset classes such as commodities or bonds over the next three to six months.

The top investment choice for about half of these buy-side professionals is the megacap tech and artificial intelligence stocks at the heart of a seven-week, record-setting surge in the S&P 500 Index. 

“We continue to see opportunities in some of the hyperscalers, which have led the AI build-out and are now beginning to generate tangible returns eaon their investments,” said Raphael Thuin, head of capital market strategies at Tikehau in Paris.

The bullishness is evident as tech-heavy indexes like the Nasdaq 100 and the Philadelphia Semiconductor Index, or SOX, hit repeated records in a sharp rebound from their Iran-war lows. The return of AI as a key investment thesis and powerful earnings growth have fuelled the frenzy, with investors setting aside worries about companies overspending. 

For all the exuberance, causes for concern are not hard to find. A look beneath the index-level moves shows the rally is extremely concentrated and displays signs of overheating. 

Just four stocks are responsible for more than half of the S&P 500’s gains in 2026. Meanwhile, the SOX currently trades at more than 25 times forward earnings, well above its average of 19 over the past decade. Positioning has turned far more crowded and technical signals are flashing overbought levels. That makes the set-up a lot more fragile.

What would it take to break this rally? Most investors interviewed pointed to the yield on 30-year US Treasuries holding sustainably above 5 per cent – the level where it is already trading. Alexandre Drabowicz, chief investment officer at Indosuez Wealth Management, called that the “danger zone” for stocks.

Apprehension about yields is creeping higher as the impasse in the Strait of Hormuz persists, increasing the risk of elevated oil prices feeding into inflation and harming the economy. On Friday (May 15), a global rout in government bonds sent longer-dated US Treasury yields to nearly their 2023 peak.

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Long-term interest rates “sit at the crossroads of the cost of capital for AI capex and private credit,” said Kevin Thozet, from the investment committee at Carmignac. They affect the financing of government deficits and he noted their potentially “adverse impact” on consumer wealth. 

Stagflation and hawkish central banks were cited by many of the 32 investors as key risks the market is failing to price properly. Those responses underscore how the bond market looms large in stock investors’ peripheral vision as the main threat to equities.

“While equities are seeing life through rose‑tinted glasses, rates continue to rise,” said Benoit Peloille, chief investment officer at Natixis Wealth Management. He warned that a “reality check” could follow if yields keep climbing.

Worries over stagflation and rate hikes were topped only by the fear that over-optimism about corporate earnings will come back to bite investors, identified as the No 1 underpriced risk. Confidence around growing profits has been a cornerstone of this rally, helped along by an exceptionally strong reporting season.

In the US, earnings per share for S&P 500 members have climbed more than 27 per cent in the first quarter in 2026 from a year earlier, more than double analyst expectations. It’s the strongest growth rate since 2004, outside of recoveries from major shocks. 

European results have also surpassed projections, albeit with a more modest 7.5 per cent annual improvement. In both regions, the strong performance has raised the bar significantly for the rest of 2026, and any missteps will likely be punished. 

“If earnings were to hit an air pocket, a lot more investors would consider selling equities, since it’s the bedrock of their investment thesis,” said Sameer Samana, head of global equities and real assets at Wells Fargo Investment Institute.

The rally took a breather on May 15, but not before the S&P 500 and the Nasdaq 100 both charted fresh all-time highs during the week. It is the type of performance that sustains faith among stock bulls about where the best returns in coming months lie.

“Equities all day,” said Sadiq Adatia, chief investment officer at BMO. “I don’t think it’s even close.” BLOOMBERG