AI Stocks May Finally Face Old Valuation Rules as Rates Stay High

For much of the AI rally, the usual rules of stock valuation seemed to be on hold. Investors have been willing to pay high multiples for companies that promise large future earnings from artificial intelligence, and that enthusiasm has lifted much of the tech sector. UBS's Michel Lerner suggests that this leniency may not last now that interest rates are higher than they were during the years of cheap money.

The core of the argument is historical. Surges in investment, and the profits those surges produce, have repeatedly proven hard to sustain for U.S. tech companies. Spending booms tend to draw in more capital and more competitors, and the returns on that spending often shrink once the first wave passes. In Lerner's view, that pattern is a reason to question how much of the current optimism is already built into prices.

Interest rates matter because they set how much future profit is worth today. When borrowing costs are elevated, earnings expected years from now are discounted more heavily, which pulls down what investors will pay for growth stories. Companies whose valuations depend on distant cash flows are the most exposed to that change.

For investors, the takeaway is less a call on any single stock than a warning about the framework. Valuation discipline that was set aside during the AI rally could return, and portfolios that assumed uninterrupted profit growth may need a second look.