UBS has warned that U.S. stocks could be more vulnerable than other developed markets if rising bond yields begin to pressure equities.
The bank pointed to stretched valuations, particularly among companies linked to the artificial intelligence boom, as a key source of risk.
Rising Bond Yields Create New Pressure
In a note to investors, UBS HOLT analyst Michel Lerner said several factors have pushed government bond yields to levels not seen since before the global financial crisis.
These include the conflict in the Middle East, persistent inflation, fiscal concerns in heavily indebted economies and the substantial financing needs associated with the AI investment cycle.
Despite these pressures, equity markets have remained relatively resilient.
U.S. Stock Valuations Remain Elevated
According to UBS, valuations remain especially demanding in the United States.
So far, investors have largely overlooked macroeconomic concerns and continued rewarding companies that generate strong cash returns and earnings growth.
Artificial intelligence stocks have played a major role in supporting that market strength.
However, UBS cautioned that this disconnect between high bond yields and expensive equities may not continue indefinitely.
Bond Market Stress Could Spread to Stocks
Lerner noted that periods of bond-market stress have historically tended to spill into other asset classes.
Governments facing large deficits often struggle to reduce borrowing without either slowing economic growth or increasing inflation risks.
That creates the possibility that continued pressure in sovereign bond markets could eventually weigh on stocks.
Among highly indebted developed economies, UBS sees the U.S. equity market as particularly exposed.
AI Stocks Could Be Especially Sensitive
Many U.S. companies, particularly those connected to the AI supply chain, trade at valuations that assume very strong future cash flows.
That makes them especially sensitive to increases in the cost of capital.
Higher bond yields reduce the present value of future earnings, which can put additional pressure on high-growth companies whose valuations depend heavily on profits expected many years ahead.
Lerner described the U.S. as the longest-duration equity market among developed economies.
Higher Rates Raise the Bar for AI Investment
Rising yields also increase the required return for new investment projects.
That is particularly important for artificial intelligence infrastructure, where companies are spending heavily on data centers, chips and computing capacity.
Investors have already started questioning whether some of these large AI investments will generate sufficient returns.
If borrowing costs remain elevated, those concerns could become more significant.
U.S. 10-Year Yield Remains Elevated
The U.S. 10-year Treasury yield was trading around 4.85%, highlighting the continued pressure from higher interest rates.
Elevated Treasury yields can make bonds more attractive relative to stocks and increase financing costs for companies.
This dynamic can be particularly challenging for highly valued growth stocks.
UBS Favors Strong Balance Sheets
In a higher-rate environment, UBS believes investors should focus on companies with strong competitive advantages, healthy balance sheets and lower sensitivity to long-term interest rates.
The bank also recommends caution toward highly valued companies whose capital spending exceeds the cash they generate internally.
These businesses could become more exposed if borrowing costs remain high or investor confidence in future growth weakens.
Bond Yields Could Become a Key Risk for U.S. Equities
The main concern for investors is whether rising bond yields eventually force a broader reassessment of U.S. stock valuations.
For now, strong earnings and AI-related growth have helped equities remain resilient.
However, if yields continue to climb, expensive growth stocks could face increasing pressure as investors demand higher returns and reassess future cash-flow expectations.
