JPMorgan believes that interest rate hikes do not signal the end of the bullish rationale for U.S. equities, as AI-related capital expenditure and corporate earnings can still support the equity market. However, fiscal deficits, bond supply, and geopolitical risks will continue to push up long-term interest rates. The primary concern is the 10-year U.S. Treasury yield rapidly approaching 5.5%-6%, at which point pressure on high-valuation growth stocks may increase significantly.
Following the Federal Reserve's announcement of a 25-basis-point rate hike on Wednesday local time, the market did not continue its previous risk-off trade. Instead, it experienced a sharp reversal the next day: U.S. equities and bonds rose in tandem, with AI chip stocks leading gains in the technology sector, while concentrated short covering further amplified the rally. On Thursday, the S&P 500 reclaimed its 50-day moving average, the Nasdaq led major indices higher, and AI chip stocks, which had previously been sold off, staged a strong rebound.
This dramatic market reversal also echoed insights from JPMorgan's Strategic Research Department's 2026 Global Macro Conference held on September 10. The conference brought together 15 speakers from the macro and market fields, with the core assessment being that in the current cycle, equities and long-end U.S. Treasury yields can rise simultaneously, and simple rate hikes are insufficient to end the bull run in U.S. stocks.
JPMorgan believes that expanding AI capital expenditure and corporate earnings remain the core forces supporting equity markets, while fiscal deficits, increased Treasury supply, and rising term premiums continue to push up long-end yields. The real concern is not the continued rise in yields per se, but rather the 10-year U.S. Treasury yield breaking through the 5.5%-6% range, particularly if it surges too rapidly toward this "fear threshold."
Rate hikes may not crush U.S. stocks; 5.5%-6% is the key threshold
Compared with previous cycles, U.S. equities are becoming less sensitive to interest rates. The growing share of AI, healthcare, and services in the economy has weakened the constraints of traditional interest rate transmission on stock valuations. JPMorgan's equity strategy team expects the S&P 500 to reach 8,000 points by year-end, arguing that earnings growth, lighter positioning, and valuations that have not yet reached extreme levels continue to provide support.
However, this resilience has its limits. The conference noted that the 5% yield level, to which markets were previously more sensitive, has shifted higher. The range where 10-year U.S. Treasury yields truly pressure equity markets may now be 5.5%-6%. Technology and growth stocks account for approximately 34% of the S&P 500 and are more sensitive to forward earnings and long-end interest rates.
Furthermore, the speed of yield increases is more important than their absolute level. A slow and orderly rise may still be absorbed by earnings growth, but a rapid surge in the short term could simultaneously impact valuations and corporate capital expenditure.
AI investment continues to expand, but bottlenecks have shifted from demand to supply
High interest rates have not significantly dampened the AI capital expenditure cycle. The combined capital expenditure guidance for 2026 from the five major U.S. hyperscale cloud computing companies exceeds $750 billion, with expectations to surpass $1.1 trillion in 2027. By 2030, the cumulative scale of AI capital expenditure could reach $5.5 trillion.
JPMorgan projects that the investment-grade corporate credit market will provide over $2.1 trillion in financing for data centers over the next five years, while high-yield bonds and leveraged loans will contribute an additional approximately $350 billion.
Meanwhile, the primary constraints on AI investment are shifting from demand to power supply, transmission infrastructure, land availability, and regulatory approvals. The growth rate of U.S. grid load has risen from approximately 1% to 3%, while the approval cycle for transmission projects remains protracted. Provided that infrastructure keeps pace, AI capital expenditure is still expected to translate into productivity growth, potentially contributing around 0.5 percentage points to labor productivity growth over the next one to two years.
This is also a key reason why U.S. equities can withstand higher interest rates: if AI investments ultimately materialize as revenue and productivity growth, earnings expansion can partially offset the pressure on valuations from rising rates.
Long-end interest rates, fiscal policy, and geopolitical risks are the true threats that U.S. equities need to guard against.
The rise in long-end yields is not unique to the United States. European yields have also climbed, suggesting that fiscal supply and term premiums may be more significant drivers than AI investment itself. A survey by the Federal Reserve Bank of New York shows that the term premium on 10-year U.S. Treasury bonds has risen to approximately 125 basis points, reflecting persistent market concerns about the long-term fiscal sustainability of the United States.
Geopolitical tensions could reignite inflation through higher oil prices. JPMorgan’s commodities team estimates that under a "permanent conflict" scenario, the average Brent crude price in 2027 could reach $87 per barrel, significantly higher than the $64 per barrel projected under a peace scenario.
Meanwhile, domestic "affordability politics" in the United States may continue to reinforce fiscal expansion. Conference surveys indicate that 75% of participants expect Congress to remain divided after the midterm elections, while the cost of living remains one of the primary financial pressures facing American households.
Therefore, the market is not currently facing a binary choice between "rate hikes or rising U.S. equities," but rather whether earnings and AI investment can continue to outpace interest rate pressures. As long as long-end yields rise in an orderly manner, U.S. equities may continue to move higher in tandem with Treasury yields; this balance would only be truly challenged if the 10-year U.S. Treasury yield rapidly approaches or breaks through the 5.5%-6% range.