The Federal Reserve's first interest rate hike in three years only managed to knock US stocks lower for a single session. Last Wednesday, the Fed raised its federal funds rate target range by 25 basis points to 3.75%-4.00%, marking the first increase since July 2023, with the S&P 500 slipping about 0.4%, the Dow falling 1.2%, and the Nasdaq finishing roughly flat that day. The very next session, sentiment flipped dramatically: the Nasdaq surged 1.69%, the S&P 500 gained 1.14%, the Dow added 0.62%, and the Philadelphia Semiconductor Index jumped about 3.1%.
By Monday, the rebound had escalated into a full-blown breakout. The Nasdaq climbed roughly 1.6% and the S&P 500 rose about 1%, with Intel surging 13%, AMD advancing 9.2% and crossing the $1 trillion market capitalization threshold, and Micron adding another 2.3% as the Philadelphia Semiconductor Index closed up around 4%. European equities gained 1.12% and South Korea's KOSPI composite advanced 1.65% on the same day. Simultaneously, Brent crude and the 10-year US Treasury yield retreated together, with Brent breaking below $100 intraday and touching near $99, while WTI crude fell nearly 5% to around $95. The 10-year Treasury yield closed at 4.945%, down about 10 basis points from the 5.041% peak hit last week, which was a 19-year high.
On the surface, this looks like "AI reloaded," but what truly bailed out the bulls was the dual decline in oil and bonds, as the short-term pressure from energy-driven inflation and the valuation squeeze from high interest rates both eased at the same time. Examining the trading sessions from September 16 to 21 reveals two distinct and clearly separated market playbooks. On the day of the Fed meeting, markets traded the "tightening script": the hike met expectations, but the Fed simultaneously raised its policy path projections, with most officials expecting at least one more hike of equal magnitude within the year. Chair Warsh emphasized after the meeting his commitment to bringing inflation back to the 2% target. The statement also removed the previous language attributing high inflation to supply shocks that were "pushing up prices in some industries including energy," replacing it with "inflation remains elevated," signaling the Fed no longer views inflation as a temporary phenomenon that can be ignored. The Dow's 1.2% drop that day was the most direct reaction.
From the next day onward, markets switched to the "AI script." One trigger was Asian data: South Korea's exports for the first 20 days of the month hit an all-time high for that period, led primarily by chip demand. More critically, the AI hardware chain showed no signs of weakening demand, as Microsoft, Meta, Google, and Amazon all refrained from announcing cuts to their AI capital expenditure plans, and there were no clear signals of softening demand for GPUs, servers, or storage. Money subsequently flowed back into the AI and semiconductor sectors that had fallen the most, and on Monday Bitcoin rose to $85,221, hitting a January high, showing that the risk-appetite repair also spilled over into crypto assets.
The real foundation of this rebound is the simultaneous occurrence of two things. The first is oil prices. Brent had spiked above $109 last week but pulled back to around $100 on Monday, breaking below that level intraday. The reason is not that Middle East risks have been resolved, but rather that visible signs of supply recovery have emerged: tanker tracking firm Kpler data shows Saudi exports have recovered to slightly above 4 million barrels per day since September, after falling to 2.4 million barrels per day in August, the lowest level since at least 2013. Satellite data shows Saudi crude flows through the Strait of Hormuz averaged 2.9 million barrels per day over the six days through September 20, far above August's roughly 700,000 barrels per day. Additionally, Trump indicated it was "possible" he would meet with Iranian President Pezeshkian during the UN General Assembly, and the opening of a diplomatic window further compressed the geopolitical premium. The second is US Treasuries. Last week saw a sixth consecutive week of bond market selling, with the 10-year yield briefly breaking above 5% for the first time since 2007, the 30-year touching a 22-year high before closing at 5.4%, and the 2-year rising to 4.75%, its highest in over two years. On Monday, as oil prices fell, the entire yield curve moved lower: the 2-year closed at 4.738%, the 5-year at 4.825%, the 10-year at 4.945%, and the 30-year at 5.281%. Ten-year yields in the eurozone and UK also declined about 5 basis points in tandem.
The logic chain is not complicated: oil prices determine inflation expectations, inflation expectations determine long-end rates, and long-end rates determine the discount rate for high-valuation growth stocks. When two easing signals appear simultaneously on the "energy shock-inflation-hiking" chain, longest-duration assets like AI benefit first. Goldman Sachs' global co-head of FICC, Segal, had previously pinpointed the extreme version of this preference: rather than buying long-dated Treasuries, one might as well go long computing power, even if the 10-year yield returns to around 5%.
The AI narrative underpinning this rebound did secure hard evidence this week. On Monday, Meta Platforms' newly launched AI agent Muse initially gained traction with consumers, igniting market expectations that widespread adoption of AI agents would trigger surging demand for computing power, leading to a massive influx of funds into chip stocks including AMD, Intel, and Arm. Muse quickly rose to the top of Apple's App Store free apps chart after its launch, demonstrating strong initial consumer demand. This performance rekindled market imagination about AI agent proliferation and shifted investor focus further from the GPUs needed for AI model training to the CPU and other compute resources required for AI agents to operate. Meta released Muse earlier this month, positioning it as a personal AI agent capable of executing tasks directly on behalf of users. Unlike traditional chatbots primarily responsible for generating text or answering questions, Muse can help users complete practical tasks such as online shopping, buying movie tickets, and booking services.
Wedbush analyst Matthew Bryson noted that AI agents rely on a large number of compute-intensive applications, and in this market, the primary compute suppliers include Intel and AMD. Storage is currently the tightest link. Intel CEO Chen Li-wu warned at an AI infrastructure summit in Santa Clara on September 15 that prices for some memory products have risen to five to seven times their original levels, and that memory costs for low-end phones and laptops now account for 70%-80% of total device materials costs, adding that "capacity is very limited and many businesses are delayed because they cannot get enough memory." After consulting with the world's three major memory makers, his conclusion was "no relief before 2028." Jefferies analyst Jacky He stated that as AI agents gain wider consumer adoption, higher AI inference, task orchestration, and infrastructure workloads are expected to drive growth in server CPU demand.
Industry data corroborates this trend: Gartner projects global storage revenue will reach $837.3 billion this year, up approximately 280% year-over-year, with storage's share of total semiconductor revenue rising from 27% to 54%. TrendForce data shows server DDR5 contract prices rose 93%-98% quarter-over-quarter in Q1, another 53%-58% in Q2, with Q3 gains narrowing to 13%-18%. Micron posted 84.9% gross margins last fiscal quarter, with DRAM prices up about 60% quarter-over-quarter. This is the industrial foundation behind Micron and AMD leading the gains. Order books and pricing on the compute side are also speaking volumes. Nvidia stated in August that Vera Rubin has begun production and shipping, with purchase orders secured from hyperscale cloud providers, AI cloud service providers, and systems manufacturers, and its data center business generated $89 billion in revenue last fiscal quarter, up 117% year-over-year, with revenue from hyperscale customers more than doubling. Compute rental pricing has also not loosened: Nebius plans to raise on-demand instance prices for H100, H200, B200, and B300 by approximately 17%-21% starting October 1.
The part being obscured is that interest rates have not actually loosened. What truly demands caution is that this rally is built on the interpretation that "the pace of tightening may slow," while rate expectations themselves have not moved. According to CME FedWatch data, futures market pricing for another 25 basis point hike in October has risen to 55%, up from below 43% a week earlier, and the probability of at least one more hike before year-end stands at about 89%. The dot plot shows most officials expect another hike this year. Chicago Fed President Goolsbee amplified this risk on Monday, saying inflation may have moved beyond the oil shock of the past 18 months and that strong demand is also pushing prices higher, and if the main theme is "demand overheating," then "the rate response will be more aggressive and more front-loaded." Stronger voices come from the sell side. Bank of America strategists previously warned investors to prepare for the Fed pushing its benchmark rate above 5%, arguing that Warsh's characterization of last week's hike as merely removing "one dose of accommodation" indicates officials do not believe monetary policy is currently constraining the economy. The structure of the bond market also confirms this divergence: short-end (2-year) yields remain near their highest levels since July 2024, while long-end yields are declining alongside falling oil prices, meaning the market is pricing not "the end of tightening" but rather "temporary relief from short-term inflationary pressure."
Three variables will determine the market's path forward. First, whether oil prices can genuinely stabilize. IG chief market strategist Beecherm's assessment is quite restrained: "Maybe last week felt apocalyptic; now it's just eased a little. But the oil price direction is clearly still upward, and this is only a minor correction." Citi's former currency official and CBA commodities head Dahl offers a more specific timeline: the global buffer of crude and refined product inventories "has fallen from an estimated 15-20 weeks two weeks ago to 5-10 weeks." Landmines on the supply side have not been cleared either: Yemen's Houthi rebels attacked Saudi Arabia over the weekend with air raid sirens sounding in Riyadh, and Libya's largest oil field has cut production by more than half due to pipeline closures. If the energy shock persists, Yardeni Research's warning will come to pass: "The longer the energy shock lasts, the higher the risk of a second wave of inflation."
Second, whether AI capital expenditure can continue to materialize. The bulls' strongest argument comes from Principal Asset Management chief global strategist Seema Shah: "Central banks are raising rates to combat inflation, not to slow the economy, which means tightening will be gradual and limited. Higher rates may hinder further valuation expansion but are unlikely to materially suppress earnings or derail the broader bull market." This statement corresponds to the fact that hyperscalers have not cut orders, and the order books for memory and compute continue to lengthen. The risk lies in whether these orders can convert into revenue and profits as scheduled, which is why Micron's earnings report on September 30 is so critical. The same set of facts has another side: costs are now feeding back along the same chain. Nvidia has decided to raise AI server product prices by at least 15% starting next year, citing memory cost increases as the reason. Intel plans to raise PC processor prices by approximately another 10% on October 5, its third price increase since the end of 2025. For cloud providers, this means the unit price of AI capital expenditure is rising, and the funding sources for capital expenditure are already stretched: reports indicate that technology companies have provided up to $300 billion in guarantees over the past year to finance data centers and chips, keeping most obligations off their balance sheets.
Third, how much capacity remaining in the market can absorb further gains. An easily overlooked signal is market breadth: the percentage of bears with voting rights rose to 53.3% by the end of last week, the highest since May 2025, and only about 30% of S&P 500 components are trading above their 50-day moving averages. This suggests the rally is more about funds regrouping in a select few AI and semiconductor leaders rather than a broad-based return of risk appetite, and if either oil or bonds reverses from the dual decline, concentrated positioning will amplify the drawdown.
Wall Street analysts remain divided. Shah represents the bull case of "gradual tightening, earnings above all," while Beecherm and Dahl represent the bear case that "the oil drop is only temporary relief and buffers are being depleted." Goolsbee and Bank of America strategists remind us that the "gray rhino" of rate hikes has not left, it has merely been temporarily obscured by falling oil and bond yields.
Comments