Bank of America: AI Rally Looks Resilient Even With Rates Elevated

In a Wednesday client note, Bank of America argued that a major macroeconomic jolt would be needed to knock the artificial-intelligence-led advance in technology stocks off track, even with long-term Treasury yields hovering at multiyear highs.

Equity strategist Benjamin Bowler said higher interest rates, stubborn inflation, budget concerns and the upcoming leadership change at the Federal Reserve are leaving investors cautious ahead of a historically volatile period on the calendar.

Still, he conceded that past episodes suggest macro headwinds often fail to break tech enthusiasm, pointing to the late 1990s when U.S. 30-year yields jumped 200 basis points and the Fed lifted rates by more than 100 basis points even as the Nasdaq soared.

Bowler added that Middle East tensions have so far also not dampened sentiment. He noted that technology earnings are currently growing faster than share prices, which is pushing a de-rating in the core U.S. AI names, while the firm's bubble-risk indicator for the broader Nasdaq remains contained.

That does not mean investors should skip protection. "This doesn't mean not to hedge macro risk," Bowler wrote, explaining that volatility markets look cheap because they have yet to reflect obvious concern over these risks.

He said equities should be expected to rebound sharply from any pullback, much as they did during the dot-com era.

Yet those rebounds should be treated cautiously, because "rapid recoveries from dips remain one of the most telling signs of a bubble building," the analyst wrote.