Investing.com -- UBS has warned that U.S. equities look the most vulnerable of any developed market if rising bond yields begin to weigh on stocks, pointing to stretched valuations across the artificial intelligence trade.

In a note, HOLT analyst Michel Lerner told investors that the Middle East crisis, inflation, fiscal concerns in heavily indebted countries and the large debt-funding needs of the AI supply chain have pushed government yields to levels not seen since before the global financial crisis.

Equity valuations, by contrast, remain far more demanding, especially in the U.S. So far, equity markets have largely shrugged off those macro concerns, rewarding strong corporate cash returns and growth led by AI stocks, Lerner said.

But he cautioned that the divergence may not last. "History suggests bond vigilante episodes rarely remain contained given the challenges of curbing deficits without weakening growth or fuelling inflation," Lerner wrote.

Among highly indebted economies, U.S. stocks appear particularly exposed to a spillover, according to the note.

Lerner explained that many, especially in the AI value chain, trade at valuations implying record future cash flows, making them highly sensitive to a rising cost of capital.

"In effect, this makes the US the longest-duration equity market among developed economies," Lerner wrote.

Higher yields also lift the hurdle rate for growth projects, he added, which is especially relevant to AI infrastructure spending where returns are already being questioned.

In a higher-rate world, Lerner said investors should favor companies with economic moats, strong balance sheets and limited duration risk, while being cautious on highly valued firms whose spending exceeds their internal cash generation.