The Fed’s Next Move: Can AI Earnings Outrun Rising Yields?
The AI rally is gaining momentum just as the Federal Reserve prepares to make its next policy decision. On Tuesday, QQQ rose 1.27% and SPY gained 0.56%, with investors positioning ahead of the announcement.
Semiconductors led the advance. AMD jumped 5.45%, Broadcom gained 4.00%, and Nvidia added 0.90%. The pattern suggests investors are still willing to pay for exposure to AI infrastructure, but the wider market remains more selective.
The real question is whether earnings can justify the rally if interest rates stay higher for longer.
1. The market is rewarding AI spending — for now
AMD and Broadcom have attracted attention as demand expands beyond traditional GPUs into custom AI accelerators and networking infrastructure.
These businesses could benefit as cloud providers and AI developers build more computing capacity. However, strong share-price performance also raises expectations. Investors will need continued order growth, credible revenue forecasts and healthy margins to support higher valuations.
2. The Fed’s message matters more than the headline rate
Markets widely expect the Fed to hold its policy rate at 3.75%–4.00%. But a decision to hold would not necessarily be positive for technology stocks.
If policymakers signal that inflation remains persistent and another rate increase is possible in December, Treasury yields could rise. That would increase pressure on growth stocks whose valuations depend heavily on future earnings.
A more reassuring outcome would be stable or declining yields alongside continued earnings strength.
3. Watch the bond market, not just the Fed statement
The 10-year Treasury yield is an important indicator because it influences borrowing costs and the valuation investors place on future profits.
If yields rise sharply after the announcement, even companies reporting strong results could face share-price pressure. If yields remain stable and earnings expectations continue improving, the market may be better positioned to sustain its advance.
4. QQQ, SPY or chip leaders?
Each offers a different exposure.
• QQQ: Greater exposure to large growth and technology companies, making it sensitive to both AI earnings and interest rates.
• SPY: Broader exposure across sectors, although a relatively small group of mega-cap companies still has considerable influence.
• Chip leaders: More direct exposure to AI infrastructure demand, but also greater sensitivity to semiconductor cycles, valuation expectations and customer spending.
The strongest recent performers are not automatically the best choices after the Fed decision. The risk is that positive expectations are already reflected in their prices.
My key takeaway: The market needs more than a Fed pause to sustain this rally. It needs evidence that AI earnings can continue growing fast enough to justify the investment and valuations.
If yields rise while earnings remain strong, stock selection could become increasingly important. If yields stabilise and AI demand broadens across sectors, the rally may have a stronger foundation.
For discussion purposes only.
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