Will interest rates be lowered? Will the AI bubble burst? As we progress through the remainder of 2024, two powerful forces—artificial intelligence (AI) and interest rates—loom large on the corporate landscape within the United States. This post will explore various possible scenarios and their impact on the S&P500 Index and the US 10-year Treasury Yield relative to current levels as of June 26, 2024
Scenario #1: A resilient US tech sector and AI advancements coupled with a reduction in interest rates (35% probability)
The ongoing AI trend and robust earnings growth continue to bolster index values, fostering innovation and driving profits. A decrease in treasury yields makes equities more appealing, potentially leading to even greater growth in the S&P 500 this year compared to last year’s impressive ~24%.
| S&P 500 Index | 10-20% increase |
| US 10-year treasury yield | ~3.8-4.0 (~10% decrease) |
Scenario #2: A resilient US tech sector and AI advancements coupled higher-for-longer interest rates (30% probability)
While AI trends and earnings growth remain positive, higher yields render fixed-income investments relatively more attractive than equities.
| S&P 500 Index | 0-10% increase |
| US 10-year treasury yield | ~4.3% (no change) |
Scenario #3: AI bubble bursts coupled with low interest rates (25% probability)
In this scenario, the AI bubble bursts, triggering risk-off behavior. Fixed income becomes more appealing as investors seek safety.
| S&P 500 Index | 25% to 15% decrease |
| US 10-year treasury yield | ~3-3.2% (~25% decrease) |
Scenario #4: AI bubble bursts coupled with high interest rates (10% probability)
Should the AI bubble burst coincide with elevated interest rates, fixed income becomes extremely attractive, potentially leading to a crash in the S&P 500 index.
| S&P 500 Index | 30% to 40% decrease |
| US 10-year treasury yield | ~4.3% (no change) |
In summary, the US economy faces a critical juncture in 2024. While AI advancements and potential interest rate reductions could boost corporate profitability, investors should not ignore the risks posed by an AI bubble burst and the persistence of higher-for-longer interest rates when evaluating investment feasibility. 📈🚀
| Research Citations (https://www.blackrock.com/ca/investors/en/literature/market-commentary/bii-2024-global-outlook-ca.pdf) | |
| S&P 500 Index predictions | Upside: “We’re overweight the AI theme in DM stocks on a six-to-12-month horizon. We see the tech sector’s earnings resilience persisting and expect it to be a major driver of overall U.S. corporate profit growth in 2024”, page 10 of BlackRock 2024 Global Outlook “Advances in computing hardware and deep learning innovations led to an inflection point for AI in late 2022. We think advances from here are likely to be exponential as innovation snowballs.”, page 10 of BlackRock 2024 Global Outlook |
| Downside: “Yet … their [AI patents] future value is highly uncertain.”, page 10 of BlackRock 2024 Global Outlook “Our macro view keeps us underweight, but we see the AI theme and alpha potential has taken us closer to a neutral view”, page 16 of BlackRock 2024 Global Outlook | |
| US 10-year treasury yield predictions | “The yield surge driven by expected policy rates has likely peaked”, page 17 of BlackRock 2024 Global Outlook |
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