AI stocks have learned to levitate with ankle weights on. Growth shares are still beating value even as higher Treasury yields make their future profits harder to justify. That tension has revived fears that the AI trade is drifting into bubble territory
Rates vs. dreams: Growth stocks usually shine when rates fall because much of their value depends on profits years into the future, but that relationship has changed. The 10-year Treasury yield hit a 2026 low in late February before climbing sharply after this week’s Fed hike. Still, the Vanguard S&P 500 Growth ETF has comfortably beaten the Vanguard S&P 500 Value ETF. Investors are paying steep prices for future growth despite higher yields, putting more pressure on earnings to justify those valuations. So far, they have delivered.
- Since late February, Vanguard S&P 500 Growth ETF has returned 15.2%, beating value by 9.9 percentage points.
- During the dot com peak stretch, S&P 500 Growth outperformed value by 8.2 percentage points as yields climbed.
Earnings Keep The AI Trade Alive
Goldman Sachs Group sees earnings strength where bubble fears see trouble. S&P 500 profits surged about 30% in each of the first two quarters, powered by AI spending and a stronger economy. Goldman expects that pace to cool, but profits should keep climbing, giving expensive AI stocks room to grow into their valuations rather than depend on prices rising alone.
- Consensus forecasts have S&P 500 earnings growing 19% in 2027 and another 17% in 2028, keeping the profit cycle firmly in expansion.
- Goldman expects earnings to rise 11% next year and sees the S&P 500 gaining 14% to ~8.7K as profits continue to support the rally.
Pressure valve: Bond-market stress may already be releasing some excess from the AI boom. Neuberger's Jeff Blazek said the S&P 500 forward price-to-earnings ratio has dropped from 22.9 last October to 19.09. The Magnificent Seven's collective multiple fell from about 33 to 23. As BlackRock's Wei Li puts it, "The bar for taking risk is rising as rates reset higher, making the durability of earnings more important." The AI trade can survive higher rates, but only if profits stop floating on hype and start carrying the weight.
