UBS Warns U.S. Equities Are Most Exposed to Bond-Market Strains

UBS has cautioned that American equities are the most exposed among developed markets to a potential selloff driven by climbing bond yields, citing elevated valuations in the artificial-intelligence complex.

Writing in a client note, HOLT analyst Michel Lerner said government bond yields have climbed to levels not witnessed since before the global financial crisis, pressured by the Middle East crisis, inflation, fiscal worries in heavily indebted economies and the enormous financing requirements of the AI supply chain.

Equity valuations, however, are considerably richer, particularly in the United States. Lerner observed that stock markets have so far mostly ignored these macro worries, instead rewarding robust corporate cash generation and AI-led growth.

He warned, however, that the divergence may prove fleeting. Lerner pointed out that historical episodes of bond vigilante pressure have rarely stayed contained, given the difficulty of reducing deficits without dampening growth or spurring inflation.

According to the report, U.S. equities look especially vulnerable to contagion among heavily indebted developed economies.

Lerner explained that many of these companies, particularly those in the AI supply chain, are valued as though their future cash flows will reach record highs, leaving them acutely sensitive to any increase in the cost of capital.

As a result, he argued, the U.S. equity market carries the longest duration among developed markets.

He added that elevated yields raise the required return threshold for growth initiatives, a particularly important consideration for AI infrastructure outlays whose profitability is already under scrutiny.

Lerner advised that in a higher-rate environment investors should tilt toward businesses with durable competitive advantages, solid balance sheets and modest duration exposure, while remaining wary of richly priced companies that spend more than they internally generate.