AI fantasy fades as Wall Street reels from real-world rate jump

economictimes.indiatimes.com:

AI promise has masked a big threat in this era of Federal Reserve hawkishness: Real-world borrowing costs have jumped across Corporate America.

Now Wall Street is fretting over the monetary danger in a week that Jerome Powell signaled his resolve once again to keep the policy stance tight — sparking a rout across Big Tech and beyond.
His tool of choice to cool the still-hot US economy: Ensuring interest rates adjusted for inflation — seen as true cost of money for borrowers — stay elevated. Real yields, which touched decade-highs this week, need to stay meaningfully positive “for some time,” the Fed chief said at the policy gathering.
It’s a chilling message for the top-heavy US equity market.

Double-digit gains this year have been fueled by optimism that nascent technologies such as artificial intelligence will unlock a new wave of growth for technology companies, justifying the sector’s eye-watering valuations. Yet skepticism is setting in as the cost of capital climbs, threatening to pressure companies big and small.


“A higher cost of capital is detrimental to equity valuations,” said Que Nguyen, chief investment officer of equity strategies at Research Affiliates.

“That said, big tech are unique companies with low leverage, fat cash flows, and wide economic moats, and these characteristics justify higher than average valuations. But at some point, the absolute and relative valuation can’t be stretched more, and we may be approaching that point for several tech names.”

The prospect of higher rates hit assets across the board.

Homebuilders fell for the seventh time in eight weeks as a group, while a basket of unprofitable technology firms tumbled with echoes of the market turmoil in March. No wonder: Benchmark 10-year