Investors keep crowding into the market's biggest tech names, and that flow is pushing indexes toward new highs. The Nasdaq 100 set another record, gaining 22% this year as the S&P 500 stays just under its August high.
The main force is artificial intelligence. Over the last three years, companies have funneled hundreds of billions into the infrastructure behind AI. That spend has created a loop where the giants doing the building rally on their AI progress, and the suppliers from chipmakers to data center builders climb as their revenue ramps.
Over the past three months, Microsoft, Nvidia and Apple have delivered the biggest point gains to both the S&P 500 and the Nasdaq 100. After lagging in the first half, the Magnificent Seven have outpaced the broader market since late July. Underpinning it all are towering earnings expectations: Bloomberg Intelligence sees third-quarter tech EPS up more than 65%, the second-fastest growth after energy, contributing to more than 24% EPS growth anticipated for S&P 500 companies. If that lands, it would be the third straight quarter of 20% plus EPS increases for the index. Rob Conzo, who leads the Wealth Alliance as its chief executive officer, said, "It's hard to even put that in perspective." "It's historic."
The backdrop is edgy as long-dated Treasury yields hover near multi-decade highs. Last week, the long bond touched 5.69% and the 10-year topped 5.3% for the first time since 2002. Ken Mahoney, the chief executive at Mahoney Asset Management, said, "With these higher rates, all of us are on edge." The 10-year briefly hit 5% in 2023.
Despite the rate shock, Big Tech has largely held onto gains, though the setup is delicate. The market seems to accept higher for longer for now, but the line where yields start to bite tech is unclear. Chris Galipeau, the Franklin Templeton Institute's head market strategist, said, "If 10-year yields go to 6%, we're going to have a different conversation."
Higher yields are already squeezing other corners of the market. The S&P 500's multiple has compressed to under 19 times forward earnings from more than 21 in May, with valuations lingering near their lowest since March.
A rally built on AI optimism and a bond market pushing yields higher is an unstable mix. Market Briefs covers both sides free every morning.
The AI buildout is pricey, and this year the funding mix has shifted. Ambitious infrastructure plans have pushed major platforms to raise cash through stock and bond sales. Alphabet, Amazon and Meta have each seen annual free cash flow flip negative. "These companies initially entered this AI build phase with maximum flexibility, holding pristine AA and AAA credit profiles, what we call the Mount Rushmore of corporate credits," said Bloomberg Intelligence analyst Robert Schiffman. "Today, however, hyperscalers like Meta, Amazon, Alphabet, Microsoft and Oracle have cash needs that far exceed internal cash sources, forcing a turn to debt markets that will drive leverage up over the next two years." He added that credit ratings have not been hit, noting, "This unique stability persists because surging EBITDA growth expectations continue to successfully offset the increased leverage."
Sentiment around AI keeps swinging between excitement and skepticism as pros debate when all that spending turns into profits, and whether the technology's broader risks even register in today's prices. Meanwhile, the market is wrestling with the war in Iran, persistent inflation driven by higher oil, and the chance of another Federal Reserve rate hike this year. Those cross-currents have swung leadership from software to hardware and back again to the Magnificent Seven.
For now, Mahoney said the strength is holding as investors expect the US war with Iran to end, which would quickly push oil lower and ease inflation's grip on the economy. If that plays out, strong earnings could keep Big Tech powering higher. That outcome is far from assured, though.
The war continues, and experts question whether crude would fall right away even if it ends. Combine that with sticky inflation and high rates, and there are plenty of ways this rally could wobble. "The interest-rate sensitive stocks are feeling it at this level," Mahoney said.
We have seen stocks rise alongside surging yields before. When the 10-year briefly hit 5% in 2023, the S&P 500 still climbed 24% that year, initiating a three-year stretch of double digit gains. Back then, the view was that the Magnificent Seven's hefty cash and light debt let them shrug off higher borrowing costs.
This year is different. With the 10-year around 5.3% and AI leaders leaning more on capital markets, results may hinge more on earnings delivery than balance sheet cushions.
The core setup hasn't flipped yet: AI spend is still the engine, earnings hopes are lofty, and leadership is concentrated. If those pillars hold, the storyline can keep running. If yields lurch toward 6% or megacap tech stumbles, the shakeout could spread, especially with the S&P 500's valuation now under 19 times next year's earnings, down from above 21 in May.
When yields reach multi-decade highs, high-growth valuations get tested. Get the free Market Briefs daily newsletter and watch the tension.
