Wall Street Reconsiders the AI-Fueled Rally as Bond Yields Near 5%

A tightening convergence of high long-term interest rates and unprecedented capital spending on artificial intelligence is prompting major Wall Street strategists to re-examine the sustainability of the current U.S. equity expansion. Multiple forecasters warn that key valuation metrics match historical pre-crash levels.

The yield on the 10-year U.S. Treasury note reached 4.97%, moving within striking distance of the 5% threshold that has largely served as a ceiling for long-term U.S. borrowing costs since the dot-com collapse in the early 2000s. The shift in tone comes as benchmark borrowing costs approach long-term highs.

Ed Yardeni, president of Yardeni Research and a veteran Wall Street strategist, reduced the probability of his base-case “Roaring 2020s” scenario from 80% to 70%. That scenario anticipates a sustained, productivity-led economic expansion. Yardeni raised the probability of a bearish outcome or market pull-back from 20% to 30%.

In an analysis published in the Financial Times, Rockefeller International Chairman Ruchir Sharma warned that a sustained break above 5% on the 10-year yield would mark a structural pivot toward tighter monetary conditions. He said such a move would directly challenge the financing models supporting large-scale technology investments.

The interest rate pressure coincides with accelerating capital expenditure among major technology companies, often referred to as hyperscalers. Microsoft Corp., Alphabet Inc., Amazon.com Inc., and Meta Platforms Inc. have collectively committed hundreds of billions of dollars to construct specialized data centers, secure energy infrastructure, and procure advanced semiconductors, such as Nvidia Corp.’s graphics processing units.

Yardeni attributed his adjustment to persistent volatility in global energy markets, particularly fluctuations in crude oil prices, along with elevated yields across sovereign debt markets. Sharma noted that U.S. gross federal debt has surged past 100% of gross domestic product, elevating overall debt-servicing costs across both public and private sectors.

According to research from Capital Economics, the pace of these expenditures is outpacing near-term monetized returns. James Reilly, senior markets economist at the London-based research firm, projected that combined free cash flow for the primary AI hyperscalers will turn negative by 2027 as infrastructure costs continue to escalate.

Rising sovereign bond yields press harder against capital-intensive industries, raising the cost of corporate debt issuance and reducing the relative attractiveness of equity risk premiums. Equity valuation relative to benchmark Treasury yields has compressed to extremes last seen during the late-1990s technology boom, reducing the yield premium offered for holding equities over risk-free government debt.

In a client note, Reilly outlined a trajectory in which the S&P 500 index advances to 8,250 toward the end of 2026, representing a 7.7% gain from recent market levels, before undergoing a major 21% contraction to 6,500 by the end of 2027.

The S&P 500’s Cyclically Adjusted Price-to-Earnings (CAPE) ratio, a metric developed by Nobel laureate Robert Shiller that adjusts corporate earnings over a 10-year trailing period, is approaching levels previously recorded during the peak of the dot-com bubble in late 1999 and early 2000.

Twelve-month forward earnings-per-share (EPS) growth projections for S&P 500 constituent companies have reached levels historically difficult to sustain over extended cycles. Market capitalization weighting within major indices remains heavily concentrated in a small group of mega-cap technology equities, often termed the “Magnificent Seven,” increasing broader index vulnerability to operational or financial disruptions within a single sector.

Primary equity offerings, including initial public offerings (IPOs) and follow-on share issuances, have expanded rapidly. Historically, elevated issuance volumes have coincided with the final stages of equity market expansions.