Bank of America: AI Stock Rally Resilient to Rising Rates, Macro Headwinds

The powerful rally in artificial intelligence-related technology stocks can likely withstand significant macroeconomic headwinds, including multi-year high bond yields and persistent inflation, according to a Bank of America research note published Wednesday.

Historical Parallels

BofA's equity-linked analyst, Benjamin Bowler, told clients that history suggests periods of tech euphoria are difficult to disrupt with macro concerns. He pointed to the late 1990s dot-com era, during which the Nasdaq Composite index soared even as U.S. 30-year Treasury yields rose by 200 basis points and the Federal Reserve hiked its benchmark rate by more than 100 basis points.

Bowler noted that current investor concerns—including rising rates, sticky inflation, and fiscal policy—have so far failed to temper enthusiasm for the AI theme, similar to past technology booms.

Fundamentals and Valuations

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The note argues that the rally is supported by strong fundamentals, with technology sector earnings currently growing faster than share prices. This dynamic is causing the core group of U.S. AI stocks to "de-rate," meaning their valuation multiples are becoming more reasonable relative to their earnings. Bank of America's internal bubble-risk indicator for the broader Nasdaq also remains at subdued levels, according to the analysis.

Caution on Bubble Signals

Despite the optimistic outlook, the note advises that investors should not ignore macro risks. "This doesn't mean not to hedge macro risk," Bowler wrote, highlighting that volatility markets appear "cheap" and do not seem to be pricing in the potential for disruption. The analyst expects equities to "bounce hard from any pullback," a pattern also seen during the dot-com era. However, Bowler warned that these "rapid recoveries from dips remain one of the most telling signs of a bubble building," urging investors to view such rebounds with caution.