Nasdaq Hits Record High Despite 24-Year Peak in US Bond Rates

The 10-year and 30-year U.S. Treasury bond rates hit their highest levels in 24 years, rising to 5.31% and 5.66% respectively. Despite this, the Nasdaq Composite Index reached a new all-time high of 27,477.31, up 1.05% from the previous day. Nvidia also saw gains, with its stock rising 2.1% and its market capitalization reaching $5.76 trillion. This unusual trend suggests that the typical relationship between high interest rates and lower stock prices is being disrupted by the surge in artificial intelligence (AI) investments.

Strong corporate profits and enthusiasm for AI are driving stock prices higher, even as interest rates climb. Analysts expect S&P 500 companies to see a more than 30% increase in profits for the third quarter compared to the same period last year, with AI-related firms leading the charge. Additionally, the likelihood of another Federal Reserve interest rate hike this month has decreased from 70% to 24%, partly due to weaker-than-expected employment growth in September.

The AI boom is also impacting bond markets. Shinichi Uchida, vice president of the Bank of Japan, noted that AI is easing financial conditions by boosting demand and asset prices, while large-scale bond issuances by AI companies are pushing long-term interest rates higher. Hyperscalers like Alphabet, Amazon, Meta, Microsoft, and Oracle have issued $220 billion in bonds this year alone.

Investment in AI shows no signs of slowing down. U.S. companies spent over $100 billion on computers and related equipment in the second quarter of this year, a 60% increase from the same period last year. Data center construction spending has also surged more than fivefold since early 2022. Andrew Sheets of Morgan Stanley Global Bond Research remarked that high borrowing rates are not deterring AI investments, as the expected returns remain attractive.

Inflationary pressures are also on the rise, with the Service Industry Price Index (ISM) for September reaching 74, the highest since July 2022. Rising fuel costs, tariffs, supply chain burdens, and AI-related infrastructure investments are all contributing to stronger demand in the U.S.