Why rising U.S. Treasury yields will hit AI and technology stocks

How high yields hit AI and technology stocks

Higher U.S. Treasury yields tend to have a negative impact on artificial intelligence (AI) and technology stocks. This is mainly due to three factors: lower present value of future earnings, increased competitiveness of risk-free bonds relative to stocks, and higher financing costs. These impacts are particularly important for Nvidia, Broadcom and other fast-growing AI-related companies, whose valuations depend largely on investors 'expectations for profits over the years.

This relationship will become particularly critical in 2026. In early September, the yield on the 10-year Treasury note was close to 4.8%, while the yield on the 30-year Treasury note exceeded 5%. Even relatively small changes in long-term interest rates can have a disproportionately large impact on highly valued growth stocks.

High yields reduce the value of future earnings

The core mechanism is "discounting". In theory, the value of a stock is equal to the present value of the cash flows investors expect the company to generate in the future. Because a dollar received a few years later is not worth as much as the dollar received today, analysts convert these future cash flows back to their present value.

U.S. Treasury yields are important because U.S. government debt is often used as the benchmark risk-free interest rate when investors value other assets. A simple example illustrates this effect:

Suppose a company expects to generate $100 in cash flow ten years from now. If calculated at a discount rate of 4%, this future $100 would be worth about $67.56 today; if the discount rate was 6%, its present value would be only about $55.84. Although the expected future cash flow itself did not change, the present value fell by about 17%.

This is why growth companies are sometimes called "long-term stocks." A large part of their expected value may depend on benefits that will not be realized until many years later. In contrast, mature banks or utilities may already generate most of the expected cash flow. As a result, AI companies that price huge profits in 2030 or 2035 are more sensitive to changes in interest rates.

High yields make bonds more competitive

High yields pose another challenge for expensive technology stocks: Investors suddenly have more attractive alternatives. If the yield on the 10-year Treasury note is just 2%, investors seeking higher returns may be more willing to take stock market risk. But this trade-off changes when yields approach 5%. Government bonds can provide substantial nominal returns without exposing investors to the earnings risks of ordinary companies.

As risk-free rates rise, investors often demand higher potential returns from stocks before they are willing to accept additional uncertainty. This can put pressure on valuation multiples, especially for companies that already trade at high P/E or P/P ratios.

This effect has a particularly significant impact on AI stocks. Semiconductor companies such as Nvidia, Broadcom, and Ultraway Semiconductor (AMD) remain at the heart of the AI investment boom, but extremely high growth expectations also mean that investors may no longer be willing to pay extreme valuation premiums when bond yields rise.

High interest rates also make AI infrastructure construction more expensive

Artificial intelligence is usually capital-intensive. Training and running advanced models require GPUs, network equipment, huge data centers, cooling infrastructure, and large amounts of electricity. Building these infrastructures increasingly involves a combination of corporate debt and cash.

Higher Treasury yields typically increase borrowing costs because corporate bonds are often priced above the spreads on comparable government debt. If a company was previously able to borrow at a 4% interest rate and now has to refinance or issue new debt at a 6% or 7% interest rate, more of the cash will be used to pay interest rather than for investments, dividends or share buybacks.

This is particularly important as the AI ecosystem expands from chip manufacturers to data centers, utilities, network companies and infrastructure providers. The larger the scale of infrastructure construction, the higher the importance of financing costs.

As a result, high interest rates put pressure on AI stocks in two directions simultaneously: on the one hand, they reduce the value of future profits today, and on the other hand, they may increase the cost of generating those future profits.

Why technology stocks don't always fall when yields rise

This relationship does not happen automatically. If the rise in yields is due to economic growth and improving corporate earnings, strong profits can offset some of the valuation pressure.

Technology stocks face a more severe environment: rising yields are due to continued inflation, fiscal concerns or a large number of government bond issuance, but economic growth has not improved accordingly. This difference is crucial because higher yields driven by strong earnings can be absorbed by the market; higher yields, caused mainly by higher returns required on government debt, are difficult to overcome by highly valued growth stocks.

For investors, Treasury yields are more than just a bond market statistic. It affects how future corporate profits are valued, the attractiveness of safe assets relative to stocks, and the cost of infrastructure financing that underpins the AI boom. That's why seemingly small changes in the 10-year Treasury yield can sometimes lead to large swings in Nvidia, Broadcom or the broader Nasdaq index.