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FollowingNasdaq hits new high: Strong AI earnings offset upward pressure on interest rates
The Nasdaq index rose 1.06% to close at 27,477.31 points; the Standard & Poor's 500 index rose 0.67%. Shares of Nvidia and Broadcom both rose about 2.1%, and technology giants such as Microsoft and Meta also jointly contributed to the market's rebound. At the same time, the U.S. 10-year Treasury yield rose to about 5.31%, the highest level since 2002.
Typically, this combination poses a challenge for technology stocks. Higher yields reduce the present value of future profits and provide investors with more attractive risk-free alternatives. The mechanism behind this pressure is particularly important for technology stocks, whose valuations are often highly dependent on expected earnings years later.
AI earnings exceed expectations, easing interest rate shocks
As investors enter the third-quarter earnings season, they expect profits in the S & P 500 index to grow by more than 30% year-on-year, with companies related to artificial intelligence (AI) contributing disproportionate increases. Previously, profits and AI investment in the technology industry have repeatedly exceeded analyst expectations, showing a strong profit boom.
For investors, this changes the normal logic of interest rate calculation. Although a higher discount rate reduces the value of future earnings, rapidly growing real profits can offset this negative impact. Micron, Nvidia and large cloud services companies have further strengthened the market view that demand for AI infrastructure is translating into real revenue rather than just speculation.
Fed interest rate hike concerns eased
Bond markets are not the only interest rate signal investors are paying attention to. A weaker-than-expected U.S. jobs report sharply lowered market expectations for another rate hike in October. According to Reuters, the implied probability of raising interest rates plunged from about 70% to 24%. Even if long-term Treasury yields remain high, this provides some breathing room for growth stocks.
Falling oil prices also provided a boost to the market on Monday. Brent crude oil prices fell back to near $100 as exports from the Middle East increased, easing some concerns that a new round of energy shocks was forcing the Federal Reserve to take a more aggressive inflation response.
As a result, the strong profits brought by AI and the downside of short-term Fed policy risks are overwhelming the impact of rising long-term yields.
Hidden worries still exist behind the record high
Behind the Nasdaq record, there is an important weakness. On Monday, only about 31.5% of Nasdaq stocks traded above its 50-day moving average, while only about 27% of the S & P 500 stocks were above its average. This reflects the widespread market divergence since September: large technology stocks performed strongly, while most other stocks continued to fall.
