JP Morgan: Raising interest rates is not enough to end the US stock market rally; long-term rates, fiscal policies, and geopolitics are the real risks

After the Federal Reserve announced a 25 basis point rate hike on Wednesday local time, the market did not extend its previous risk-off behavior; instead, there was a dramatic reversal the following day: US stocks and bond markets surged together, with AI chip stocks leading the technology sector, while heavy short covering further amplified gains. On Thursday, the S&P 500 recovered its 50-day moving average, and the Nasdaq outperformed major indices, as previously sold-off AI chip stocks staged a strong rebound.

The market’s dramatic reversal echoes the conclusions of the J.P. Morgan Strategy Research Division’s 2026 Global Macro Conference held on September 10. The meeting brought together 15 speakers from macro and market fields. The core judgment: in the current cycle, equities and long-term US Treasury yields can rise simultaneously, and rate hikes alone are not enough to end the US equity rally.

J.P. Morgan believes that the expansion of AI capital expenditures and corporate profits remain the core driving forces supporting the equity market, while fiscal deficits, increased Treasury supply, and rising term premiums continue to push long-end yields higher. What truly warrants caution is not yields continuing higher per se, but the 10-year Treasury yield breaking above 5.5%-6%, especially if this "fear line" is crossed too rapidly.

Rate Hikes May Not Crush US Stocks; 5.5%-6% Is the Key Threshold

Compared to previous cycles, the sensitivity of US stocks to interest rates is decreasing. The rising share of AI, healthcare, and services sectors in the economy has weakened the traditional transmission of interest rates as a constraint on equity valuations. J.P. Morgan's equity strategy team expects the S&P 500 to reach 8,000 by year-end, and believes profit growth, light positioning, and valuations that are not yet extreme can still provide support.

However, this resilience has its boundaries. The conference suggested that the formerly sensitive 5% yield level for the market has shifted higher, and that the real pressure point for equities may now be when the 10-year Treasury yield is in the 5.5%-6% range. Technology and growth stocks make up about 34% of the S&P 500 and are more sensitive to future earnings and long-term interest rates.

Moreover, the pace of yield increases matters more than the absolute level. A slow and orderly rise could still be absorbed by profit growth, but a rapid spike in the short term could impact both valuations and corporate capital spending simultaneously.

AI Investment Continues to Expand, But Bottlenecks Shift from Demand to Supply

High interest rates have not yet significantly weakened the AI capital expenditure cycle. The combined capital spending guidance from the top five US hyperscale cloud companies exceeds $750 billion for 2026, and is expected to surpass $1.1 trillion in 2027; by 2030, cumulative AI capital spending could reach $5.5 trillion.

J.P. Morgan projects that, over the next five years, investment-grade corporate credit markets will provide over $2.1 trillion of funding for data centers, with high-yield debt and leveraged loans contributing an additional $350 billion.

At the same time, the main constraints on AI investment are shifting from demand to power, transmission, land, and regulatory approvals. The US grid load growth rate has increased from about 1% to 3%, but the approval process for transmission projects remains lengthy. As long as infrastructure can keep pace, AI capital spending is still likely to translate into productivity growth, potentially contributing about 0.5 percentage points to labor productivity growth in the next one to two years.

This is also an important reason why US stocks can withstand higher interest rates: If AI investment ultimately delivers revenue and productivity growth, profit expansion may partially offset the valuation impact from higher rates.

Long-End Rates, Fiscal Issues, Geopolitics: The Real Risks for US Equities

Rising long-end yields are not unique to the US. European yields have also risen, indicating that fiscal supply and term premium may matter more than AI investment per se. The New York Fed survey shows that the 10-year Treasury term premium has risen to about 125 basis points, and market concerns over the long-term fiscal sustainability of the US persist.

Geopolitics could push inflation higher through oil prices. J.P. Morgan’s commodities team expects that, in a "permanent conflict" scenario, the average price of Brent crude could reach $87/barrel in 2027, significantly higher than $64/barrel under a peaceful scenario.

Meanwhile, domestic “affordability politics” in the US could further fuel fiscal expansion. A survey at the conference showed that 75% of participants expect Congress to remain divided after the midterm elections, while the cost of living remains the top financial pressure for American households.

Therefore, the market is not simply facing an “either-or” between rate hikes and a US stock rally, but rather whether profits and AI investment can continue to outpace pressure from higher rates. As long as long-end yields rise in an orderly manner, US stocks can still move in tandem with Treasury yields; only when the 10-year Treasury yield rapidly approaches or breaks through 5.5%-6% will this balance truly be put to the test.