Last week, Kevin Warsh took over as the Chair of the Federal Reserve. Ahead of that, bond yields rose to alarming levels. Might bond yields soar or the AI stock bubble pop under the new chair?
The two questions are a single one on the different sides of the same coin. High bond yields cause stock markets to demand a higher risk premium. The AI suppliers like Micron (MU), Sandisk (SNDK), or NVIDIA (NVDA) trade at low forward price-to-earnings multiples. Investors cannot count on that ratio to predict if or when an AI bubble pops.
Markets need to look at the excess liquidity lifting stock markets. The SpaceX, Anthropic, and OpenAI IPOs will fetch trillions of dollars in market capitalization. Their sheer size might shrink the liquidity in the stock markets. That would put pressure on stocks like Tesla (TSLA). Firms with strong earnings like Alphabet (GOOGL), Apple (AAPL), and Meta Platforms (META) might pull back to a smaller degree.
Rate Decision Will Matter
Bond markets are pricing in a higher probability of the Fed raising interest rates. Still, even if the Fed holds the Federal Funds rate or indicates a possibility of cutting rates, bond markets will react.
JPMorgan (JPM) CEO Jamie Dimon said on Bloomberg that interest rates might keep rising. The wider credit spread would start to shake up the stock market’s confidence. The Dow Jones (DJI) closed at above 50,000, while the Nasdaq (QQQ) and S&P 500 (IVV) hovered near all-time highs.
