Increase in AI Investment and Its Impact on Tech Stocks Amid Rising Interest Rates

The surge in artificial intelligence (AI) investments has propelled the U.S. stock market to unprecedented heights. However, as big tech companies expand their AI investments through debt financing, rising interest rates have emerged as a significant risk factor for the tech stock rally. According to Bloomberg, Alphabet, Amazon, Meta, and Microsoft are expected to invest a total of $740 billion in AI computing infrastructure this year, with projections reaching $1 trillion next year. However, as these investment levels begin to exceed companies' cash flows, debt financing is increasing. Alphabet recorded its first negative free cash flow in the second quarter, while Amazon's free cash flow is expected to be negative $23.5 billion this year. Tech stocks are sensitive to Treasury yields, and when rates rise, the present value of future profits decreases, potentially putting pressure on stock valuations. While S&P 500 companies are expected to see a 32% increase in second-quarter earnings compared to the previous year, the impact of rising interest rates on corporate performance remains uncertain. Currently, if the yield on the U.S. 10-year Treasury bond reaches 5%, it could pose a significant test for the market.

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