The stock market's artificial intelligence-fueled rally is entering what Barclays describes as a "warning zone" as investors grapple with persistent inflation and the prospect of higher-for-longer interest rates.
Speaking to Fortune, Barclays Head of U.S. Equity Strategy Venu Krishna said rising Treasury yields are emerging as a key risk for equities, particularly as investors scale back expectations for Federal Reserve rate cuts.
The concerns intensified after a stronger-than-expected U.S. jobs report triggered a selloff in technology stocks on Friday, sending the Nasdaq down more than 4% and the S&P 500 down 2.6%.
Why Good Economic News Is Suddenly Bad For Stocks
The May jobs report showed the labor market remained far stronger than expected. Payrolls rose by 172,000, well above consensus estimates of 85,000, while revisions added a combined 93,000 jobs to the previous two months. The unemployment rate held steady at 4.3%.
The stronger-than-expected data came on the heels of April inflation readings that showed consumer prices rising 3.8% year-over-year, reinforcing concerns that price pressures remain persistent.
At the same time, supply-side pressures continue to weigh on the economy. Higher energy costs, tariffs on imported goods and a slower-growing labor force have all contributed to concerns that inflation could remain elevated, complicating the Fed's efforts to bring price growth back toward its 2% target.
As a result, investors have increasingly scaled back expectations for rate cuts, with money markets now largely pricing in the possibility of an additional rate hike before year-end.
Why AI Stocks Are Especially Vulnerable
According to Krishna, technology stocks are particularly sensitive to rising interest rates because much of their expected value is tied to profits projected years into the future.
At current levels, Krishna said markets are approaching a range where higher yields have historically created greater pressure on growth-oriented stocks.
"We are in the warning zone, but just in the warning zone," Krishna said. "Five percent is more of a clear level. But as we start approaching it, the market starts pricing that risk."
The Bigger Warning For The AI Trade
The move highlights a growing tension in markets: whether strong AI-driven earnings growth can continue to offset the impact of higher interest rates. Analysts have pointed to elevated valuations, heavy concentration in a small group of technology companies and massive capital spending commitments across the industry as potential sources of risk.
While many analysts continue to view AI as a long-term growth theme, recent market moves suggest investors are becoming more sensitive to inflation, interest rates and the cost of financing the industry's unprecedented spending boom.
The strategist noted that hyperscalers are trading at around 26 times forward earnings, cheaper than they were earlier this year despite improved earnings, and said further declines would be "a huge buying opportunity."
As a result, Krishna told Fortune that Friday's selloff does not signal the end of the AI trade, but rather reflects investors adjusting to a higher-rate environment.