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Business & Stocks Economic Times Markets • Oct 09, 2026

US Stocks Rallying Past Fed Rate Shock: Aswath Damodaran Details AI Earnings Impact on Treasury Yields and Equity Risk Premiums

💡 Key Takeaways

•US equities defied rising Treasury yields due to strong AI-driven corporate earnings growth.
•Aswath Damodaran warns that equity risk premiums falling below 4% increase market correction risks.
•The ongoing market rally depends heavily on AI infrastructure investments translating into actual profits.

NEW DELHI [NCRBuzz Wire] — ### US Market Resilience Amid Macroeconomic Headwinds

**US equities have successfully decoupled from surging Treasury yields as exceptional artificial intelligence earnings growth continues to anchor corporate valuations.** According to valuation expert Aswath Damodaran, the current equity rally is heavily dependent on the sustained financial delivery of generative AI capital expenditures rather than traditional macroeconomic indicators. Higher interest rate environments typically suppress equity multiples; however, mega-cap technology firms reporting double-digit YoY net income expansions have absorbed the Federal Reserve's restrictive policy stance.

### Quantitative Shifts in Equity Risk Premiums

**The compression of equity risk premiums below the critical 4% threshold signals an elevated vulnerability to macroeconomic shocks and earnings misses.** Financial markets are currently pricing in near-flawless execution from major technology conglomerates, leaving minimal margin for operational errors or supply chain disruptions. When equity risk premiums fall below historical averages, investors demand lower compensation for holding stocks over risk-free government bonds, increasing the probability of a sharp asset repricing.

| Metric / Aspect | Details |

|---|---|

| Primary Growth Driver | AI-Led Corporate Earnings |

| Macro Headwind | Rising US Treasury Yields |

| Equity Risk Premium | Below 4.0% Threshold |

| Valuation Expert | Aswath Damodaran (NYU Stern) |

| Federal Reserve Stance | Restrictive Interest Rate Policy |

### Corporate Profitability Versus Capital Expenditure

**Market longevity now hinges on whether massive infrastructure spending in AI chips and data centers will translate into tangible free cash flow generation.** While top-line revenue metrics remain robust across the technology sector, investors are increasingly scrutinizing the return on invested capital (ROIC) for multi-billion-dollar AI investments. Failure to meet projected monetization timelines could trigger rapid capital flight and broader market corrections across global indices.

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🏛️ Background Context

Throughout monetary tightening cycles, rising bond yields historically compress stock valuations by elevating borrowing costs and risk-free discount rates. However, the unprecedented revenue acceleration in artificial intelligence technologies has created a divergence, allowing mega-cap tech equities to withstand macroeconomic pressures temporarily.

💡 Citizen & Commuter Quick Explainer (FAQ)

Q1: What is driving the current US stock market rally despite high interest rates?

The rally is primarily driven by robust, double-digit earnings growth from artificial intelligence infrastructure and technology companies.

Q2: Why are experts concerned about equity risk premiums falling below 4%?

A sub-4% equity risk premium indicates that markets are priced for perfection, leaving very little margin of error for earnings misses or macroeconomic shocks.

Q3: What is the key risk highlighted by Aswath Damodaran for investors?

The primary risk is a sharp market correction if multi-billion-dollar AI investments fail to generate the projected free cash flows.

Verified Wires: Economic Times Markets Original Wire Dispatch ↗

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