Key facts
- Rising bond yields are contributing to a more orderly deflation of AI stock valuations.
- The S&P 500's forward price-to-earnings ratio has decreased from 22.9 last October to 19.09.
- The collective forward PE ratio of Magnificent Seven stocks has declined from approximately 33 to 23.
- Despite valuation pullbacks, the S&P 500 has risen 12.8% since its forward PE peak in October.
- Higher Treasury yields increase the attractiveness of risk-free returns, making investors more discerning about stock valuations.
- BlackRock Investment Institute maintains an overweight rating for US and AI stocks due to exceptional earnings growth, attractive valuations, and a cleaner tactical backdrop.
The current market environment, characterized by rising bond yields, is allowing for a more orderly correction in AI stock valuations, according to market strategists. This contrasts with typical market deratings that often lead to more significant price drops.
Rising yields on 10-year Treasurys, influenced by concerns over oil prices, persistent inflation, and increasing government debt, have historically pressured stock valuations. However, in the current scenario, earnings growth has managed to outpace stock price increases, leading to a more moderate decline in price-to-earnings ratios.
Jeff Blazek, co-head of multi-asset strategies at Neuberger, noted that the S&P 500's forward price-to-earnings ratio has fallen from a high of 22.9 in October to 19.09. This current valuation is considered moderate over the past six years. Similarly, the Magnificent Seven stocks have seen their collective forward PE ratio decrease from around 33 to 23. Despite these valuation adjustments, the S&P 500 has still gained 12.8% since its last forward PE peak.
Wei Li, global chief investment strategist at the BlackRock Investment Institute, stated that the rising bar for taking investment risk due to higher rates makes earnings durability crucial. BlackRock maintains an overweight rating on US and AI stocks, citing exceptional earnings growth, attractive valuations, and a favorable tactical backdrop.