Back to Rate Hikes in September? Can AI Boom Support?
The major indices sold off yesterday: $S&P 500(.SPX)$ fell 0.57%, $NASDAQ(.IXIC)$ dropped 1.15%.
Today started differently. Stocks opened higher, with the S&P up about 0.2%, the Nasdaq Composite up 0.5%, and the Nasdaq 100 up 0.6%, before giving back some gains during the session.
Just weeks ago Goldman Sachs was talking about S&P 8000. Now Citadel and PGIM are warning about inflation, rates, and valuation risk. Japan has already begun tightening.
The global conversation is shifting from rate cuts back to rate hikes.
Just days ago, the Bank of Japan raised rates by 25 basis points to 1%. A few weeks earlier Goldman Sachs was calling for S&P 8000 and raising targets across Asia. Now both Citadel Securities and PGIM, which manages roughly $1.4 trillion, are warning that high rates, sticky inflation, and stretched AI valuations could collide.
Before the Iran conflict escalated earlier this year, markets were pricing multiple Fed cuts. Today, swap markets are increasingly discussing the possibility of hikes instead. Even the famously dovish BOJ is tightening.
The direction of global monetary policy appears to be changing.
The most vulnerable moments often occur when a compelling long-term growth story collides with a deteriorating macro backdrop.
Today, AI plays the role that the internet once played.
High oil prices, elevated inflation, and the possibility of renewed tightening represent the macro headwinds.
Could Fed hike again in September?
The labor market remains strong, inflation remains above the Fed's target, and oil prices remain elevated despite some easing in geopolitical tensions.
Put those together, and another Fed hike as early as September becomes possible.
PGIM is even more aggressive.
Back in April, it expected rate cuts. Now it is discussing the possibility of three rate hikes before year-end, arguing that economic resilience and sticky inflation may force incoming Fed leadership to reinforce anti-inflation credibility.
To be fair, that remains a minority view.
Swap markets currently price roughly a 70% probability of one additional hike this year, with another potentially arriving in early 2027.
Markets have clearly shifted away from the rate-cut narrative, but they have not fully embraced a sustained hiking cycle.
AI is facing tougher questions: NVIDIA $20 billion bond offering
Beyond rates, investors are beginning to reassess AI economics.
Citadel points to a growing concern: can AI business models actually justify today's valuations?
Reports that OpenAI may be reducing prices on some services suggest enterprise customers are becoming increasingly sensitive to AI costs. If pricing pressure intensifies, industry profitability could end up lower than many investors currently expect.
Another interesting signal comes from NVIDIA.
The company is reportedly preparing a bond offering of at least $20 billion and potentially as much as $25 billion—the first major debt issuance since the AI boom began.
This is noteworthy because $NVIDIA(NVDA)$ generated $49 billion in free cash flow last quarter, recently authorized an $80 billion buyback program, and raised its dividend dramatically.
A company with that much cash doesn't need to borrow.
Yet NVIDIA, along with Alphabet, Amazon, and AMD, is raising capital while rates remain elevated.
The AI arms race has become so capital intensive that even the strongest balance sheets are leveraging up.
The disagreement comes down to these questions:
Can AI commercialization deliver enough earnings growth to justify current valuations?
And how far will this global tightening cycle actually go?
Is this simply a precautionary adjustment, or the beginning of the end for the current bull market?
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AI commercialization remains concentrated in infrastructure; giants like Microsoft (MSFT) must bridge heavy CAPEX with direct software monetization—though its 123% surge in AI run-rate revenue to $37 billion shows scaling adoption. Forward multiples are adjusting, with Nvidia (NVDA) trading at a compressed forward P/E of 22, down from historical peaks. This coincides with a hawkish tightening cycle, highlighted by the Fed holding the funds rate at 3.50%–3.75% while raising its median projection to 3.8%, signaling rates will stay higher for longer. Rather than the end of this bull market, the Fed's stance is a precautionary adjustment to engineer a soft landing. Consequently, the market is turning into a stock-picker's arena where cash-rich, cyclical companies outperform speculative tech. The long-term upward trend remains resilient, provided robust corporate productivity absorbs these sustained borrowing costs.
AI drives record highs via massive capex ($500B+ in 2026 for hyperscalers) and earnings in tech/semiconductors, powering S&P concentration. Yet higher rates raise borrowing costs, pressure valuations, and risk a pullback if productivity/ROI lags.
Markets are resilient but vulnerable to rotation or correction if AI hype meets reality. Diversify; expect volatility.
Before the Iran conflict escalated earlier this year, markets were pricing multiple Fed cuts. Today, swap markets are increasingly discussing the possibility of hikes instead. Even the famously dovish BOJ is tightening.
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@MHh @Shyon @koolgal @icycrystal
A September Fed hike is possible, though not my base case. The labor market remains strong, inflation is still above target, and higher energy prices could keep pressure on policymakers. Unless inflation rises again, I expect the Fed to remain cautious.
I remain bullish on AI long term, but valuation concerns are becoming more important. The key question is whether earnings growth can justify today's expectations. Going forward, profits and execution matter more than AI hype alone.
@Tiger_comments @TigerStars @TigerClub
As for tightening, this looks more like a precautionary inflation response than an aggressive hiking cycle. Unless inflation accelerates materially, central banks are unlikely to tighten indefinitely.
For the bull market, the key risk is not rates themselves but earnings. Bull markets usually end when profits weaken, liquidity dries up, or recession risks surge. So far, earnings remain relatively healthy despite higher rates.
My view: this is more likely a late-cycle repricing than the beginning of the end. Expect higher volatility, narrower leadership, and periodic corrections. The bull market remains intact unless AI earnings disappoint significantly or economic growth deteriorates enough to trigger a broad earnings recession.