2 weeks ago
AI-fueled market rally hits records as Wall Street eyes rates
Some of the biggest companies in the world are spending a lot of money on artificial intelligence, which is like teaching computers to think and learn.
People who buy stocks are very excited about this, so the stock market has been going up and up.
But there is something that could stop the fun: interest rates.
Interest rates are like the price of borrowing money.
When they go up, future company profits are worth less today, so stocks can go down.
The government's bank, called the Federal Reserve, might raise rates because prices for things are still going up.
Big companies like Alphabet, Amazon, Meta and Microsoft are borrowing money to pay for their AI plans.
Some people worry the companies are spending too much and may not make the money back.
Others think the companies are doing great and making lots of profit.
For now, the market is at record highs, but everyone is watching what happens with interest rates.
S&P 500 hit an all-time high on Thursday as subdued inflation data eased Fed rate-hike fears.
The Nasdaq 100 is within 2% of its first record since early June after a July correction.
Alphabet, Amazon, Meta and Microsoft are projected to spend $740 billion on AI infrastructure in 2026 and $1 trillion in 2027.
AI stocks rebounded, with the Magnificent Seven up 9.1% since July 29 after a sharp July selloff.
Companies are increasingly raising debt to fund AI spending, with Alphabet posting its first negative free cash flow as a public company.
- Who
- Wall Street investors and major technology companies including Alphabet, Amazon, Meta, Microsoft, Nvidia and Intel, along with the Federal Reserve.
- What
- An AI-driven stock market rally reaching record highs while facing risks from higher interest rates and heavy debt-funded AI spending.
- Where
- US stock markets on Wall Street.
- When
- August 2026, following a July selloff and ahead of the Federal Reserve's next meeting.
- Why
- Enthusiasm for artificial intelligence investments and strong corporate earnings are driving the rally, but rising rates could reduce the value of future profits.
AI Bulls
Rate Hawks
AI spending payoff
AI Bulls
Strong earnings and growing visibility into AI returns justify massive capital spending; S&P 500 second-quarter profits are on pace to grow 32%.
Rate Hawks
Companies are raising debt to fund spending, Alphabet posted negative free cash flow, and there are questions about when investments will generate proportionate returns.
Interest rate risk
AI Bulls
Strong balance sheets and healthy earnings can absorb rate pressure, and the recent rebound shows resilience.
Rate Hawks
Inflation remains above the Fed's 2% target, traders price at least one hike this year, and high-multiple stocks tend to sell off when rates rise.
Stock valuations
AI Bulls
The July drop was a healthy reset and AI remains the dominant theme of the bull market.
Rate Hawks
Rapidly rising rates could derail the rally, as in 2022 when the Nasdaq 100 tumbled 33%.
Key facts
- S&P 500
- Hit an all-time high on Thursday
- Nasdaq 100
- Within 2% of its first record since early June
- 30-year Treasury yield
- Near highest level since 2007
- Projected AI infrastructure spending (2026)
- $740 billion by Alphabet, Amazon, Meta and Microsoft
- Projected AI infrastructure spending (2027)
- $1 trillion
- Alphabet Q2 free cash flow
- Negative for the first time as a public company
- Amazon total debt (June 30)
- $242 billion
- Intel share offering
- Raised $20 billion, a third more than initially targeted
Quotes
Maria Llerena
Director of financial research at Domini Impact Investments
“"The second quarter has been one of the strongest earnings periods I've seen in my 20-year career in finance, we're seeing really strong aggregate earnings growth."”
livemint.com
“"Capex has largely been self-funded from cash flows, but now it seems to be tipping over into the companies raising debt."”
livemint.com
Keith Lerner
Chief investment officer and market strategist at Truist Advisory Services
“"We still think that AI and tech is the dominant theme of this bull market."”
livemint.com
Sources
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