Why are US stocks rallying despite Fed rate shock? Aswath Damodaran explains in the context of AI

US stocks are continuing to show resilience despite a sharp rise in Treasury yields, with Aswath Damodaran pointing to AI-led earnings growth as a key support for the market.

The contrast has drawn attention because higher yields can create pressure for equities, while falling equity risk premiums raise additional concerns about the market’s ability to withstand changing financial conditions.

AI growth provides a counterweight

Damodaran’s explanation places the strength of corporate earnings at the center of the market’s performance. In particular, growth linked to artificial intelligence is helping US stocks absorb the impact of rising Treasury yields.

This creates a tension within the market: yields are moving sharply higher, yet earnings growth associated with AI is providing support. The result is a market that has remained firm even as one measure of equity compensation, the equity risk premium, has declined.

Why the market response matters

The episode underscores the importance of earnings expectations in shaping equity performance. AI-related growth is helping offset concerns associated with higher yields, but the decline in equity risk premiums remains a point of concern identified in the analysis.

For now, the market’s resilience reflects the balance between these forces. Damodaran’s assessment highlights AI-led earnings growth as the factor helping US stocks withstand the Treasury yield surge, while the falling risk premium keeps the broader picture from being uniformly positive.