Unafraid of oil prices, long-term debt, and rate hikes! Multiple Wall Street institutions remain bullish on US stocks; Yardeni downplays concerns over AI slowdown

According to Zhitong Finance APP, despite the escalation of Middle East conflicts pushing up oil prices, long-term U.S. Treasury yields rising, and expectations of Fed rate hikes intensifying, most Wall Street strategists still believe that as long as the rate hike pace is moderate, corporate earnings remain strong, and inflation stays anchored, the U.S. stock bull market is likely to continue.

With mounting macro headwinds, why does Wall Street remain bullish?

Recently, the escalation of Middle East conflicts led oil prices to surge to nearly $109 per barrel last week, while U.S. long-term Treasury yields touched multi-decade highs. The probability of a Fed rate hike in September also spiked sharply.

The U.S. stock market has been volatile since hitting record highs in mid-August, with investors worrying that rising oil prices will exacerbate inflationary pressures. The 10-year U.S. Treasury yield approached 5% at one point, a level often considered a warning signal for equities. Swap traders are currently pricing in about an 87% chance of a Fed rate hike on Wednesday, which would be the first hike in three years. On Monday, Nasdaq 100 futures, dominated by tech stocks, fell 1.6%. However, the S&P 500 is down less than 2% from its peak, supported by strong corporate earnings.

Major Wall Street institutions, including Morgan Stanley, JPMorgan, and Goldman Sachs, forecast that given healthy corporate earnings, any dip triggered by the Fed’s rate hike expectations is likely to be short-lived.

Goldman Sachs Chief U.S. Equity Strategist Ben Snider commented, “The stock market usually struggles when the Fed starts raising rates, but we expect the bull market to continue. The market has already priced in more than three rate hikes over the next year, while corporate earnings and balance sheets both look robust.”

Morgan Stanley’s strategist Michael Wilson admitted that if the inflation shock is stronger than expected, there is risk of a market correction—a drop of about 10% from recent highs. Geopolitical tensions in the Middle East persist, with oil prices returning to an upward trend. However, Wilson added that the economic outlook is key. “If strong nominal economic growth is the main driver, then the stock market can tolerate higher back-end yields,” he said. “In other words, over the medium to long term, equities remain an effective hedge against inflation.”

JPMorgan strategists noted that short-term oil market movements may determine risk appetite. They pointed out that seasonal trends suggest equities are typically weak in September, but such volatility should not be assumed to last. The team led by Mislav Matejka wrote in a report: “As long as the Fed’s rate hikes are moderate, and occur in an environment of strong earnings growth and anchored inflation, equities should be able to withstand them.”

An analysis shows that what truly threatens a bull market is not a single rate hike, but an entire rate hike cycle. Since 1945, the S&P 500 has experienced 12 bear markets with drawdowns of over 20%, and four near-bear markets with declines between 18% and 20%. Of these, 6 entered recession directly following a rate hike cycle. Only two drawdowns were not triggered by the above factors.

Raising S&P 500 Price Targets and Divergence: Bulls Persist While BofA, Citi Warn of Short-Term Risks

Yardeni Research stated in a report that despite rising oil prices, bond yields, and Fed rate hike expectations, the S&P 500 has not reacted violently to the macro headwinds. The firm reiterated its year-end S&P 500 target of 8,400 points.

However, Yardeni Research noted that market dynamics have changed. “In recent weeks, the forward P/E ratios of major market indices have declined because forward EPS growth expectations have outpaced stock price growth.” According to the firm, since the beginning of the year, S&P 500 forward earnings have risen by 28.1%, forward P/E has dropped by 12.9%, showing that investors are less willing to pay higher valuations as they did in January. Yardeni Research raised its 2027 EPS forecast from $415 to $425 and lowered its forward P/E forecast from 20.2x to 19.7x.

Meanwhile, over the past week, several institutions reiterated or raised their S&P 500 index targets.

Last week, HSBC raised its year-end S&P 500 target from 7,650 to 8,100, citing stronger corporate earnings, sustained AI investment, and the resilience of the U.S. economy. HSBC expects the S&P 500’s earnings growth rate to reach nearly 40% in the first half of 2026, and at least 25% in the second half.

HSBC said that while tech stocks remain the primary driver, the resilience of consumer spending, as well as strong performance by healthcare, industrial, and consumer goods companies, are supporting overall profit growth. That said, HSBC also cautioned that seasonal autumn weakness, economic data, regulatory changes, and geopolitical tensions could lead to short-term volatility, but emphasized that strong corporate fundamentals should support further S&P 500 upside.

Barclays also raised its 2026 S&P 500 target from 7,800 to 7,950, citing stronger-than-expected Q2 profits, and raised its EPS forecast from $337 to $365. The bank noted that over 86% of companies beat earnings expectations, with core EPS up over 50% year-on-year. Barclays expects AI-driven investment to continue, forecasting hyperscale corporate capex to exceed $1.1 trillion in 2027, up 67%. Despite higher bond yields increasing the costs of missing earnings expectations, the bank maintained its 2027 index target at 8,800.

BofA has also joined the ranks of those raising targets, but remains more cautious. BofA Equity & Quantitative Strategist Savita Subramanian raised the year-end S&P 500 target from 7,100 to 7,400, but the new target still implies about 3% downside from current levels, highlighting the bank’s cautious stance in the short term. Subramanian said the market is entering a “seasonally weak period” and was likely overdue for a correction. She noted that the S&P 500 has only seen one 5% pullback this year, whereas on average, there are about three each year per Bank of America statistics. At least one 10% correction normally occurs each year, but the last such drawdown happened back in spring 2025.

Below are the S&P 500 target levels for 2026 from several major Wall Street institutions:

It should be noted that not all institutions are equally optimistic. Citi warned last Friday that its S&P 500 year-end target may be too high, as rising oil prices and bond yields have cast a shadow over the U.S. stock market outlook. Strategist Scott Chronert said Citi’s current 8,100-point target for the end of 2026 now “seems aggressive,” since macro factors have changed in recent weeks. Chronert still expects strong Q3 earnings, but reaching the target under current uncertainty would require greater reliance on a year-end rally.

This analyst also highlighted that despite a complex macroeconomic environment, “the next Fed rate hike is not set in stone,” but added that persistent inflation concerns may mean a rate hike could reduce uncertainty, and if the Fed does hike, there may be two hikes this year rather than one.

AI Alone Underpins the Rally; Yardeni: Slowdown Calls Unlikely to Halt Capex Cycle

Most of the S&P 500’s gains this year have resulted from the AI boom. Micron Technology, Intel, and AMD saw their share prices rise by triple digits in 2026. Meanwhile, the Global X Artificial Intelligence & Technology ETF (AIQ) has also outperformed the S&P 500 this year.

The Kobeissi Letter commented on X platform that, with the bond market so weak, it is remarkable that the S&P 500 is only a step away from record highs. “Without AI, the S&P 500 would be at least 50% lower right now. Without the oil price spike, the S&P 500 would be over 9,000 points. AI is singlehandedly supporting the global economy,” the publication said.

However, internal differences within the industry regarding the pace of AI development are beginning to dampen investor sentiment. Anthropic CEO Dario Amodei over the weekend proposed slowing AI development to allow more time to address safety concerns. OpenAI’s Sam Altman and SpaceX’s Elon Musk voiced support for stronger regulation. In contrast, the CEOs of Microsoft and Meta oppose slowing development. Altman also said OpenAI will not go public this year. Meanwhile, U.S. President Trump downplayed concerns, believing AI risks can be managed with safeguards.

Yardeni Research President Ed Yardeni on Monday sought to allay fears about a potential AI slowdown. He stated that while the market is worried that tech companies may slow AI development, this is unlikely to derail broader infrastructure construction. “The reality is that there are already constraints in building data centers and so on. I don’t think infrastructure construction will slow down.” He maintained his year-end S&P 500 target of 8,400 points.

Yardeni believes recent calls to slow AI are more about building safety guardrails rather than curtailing capital spending. He said that as technology grows more powerful, stronger safeguards may become necessary, but that should not necessarily curtail the investment cycle. He also pointed out that productivity data backs up the AI-driven growth narrative, and maintains the economy is still in a “productivity-driven technology boom.” Yardeni added the possibility of closer U.S.-China cooperation on AI regulation, saying both countries face similar challenges in technological advancement and may have incentives to set rules around its development.

For the market, Yardeni’s view is that AI-related concerns may cause short-term volatility but are unlikely to block the infrastructure investment necessary to support the continued expansion of this technology.