Fed Rate Hike Looms: Will the AI-Fueled US Stock Bull Market End?

The US stock market has experienced a significant bull run in 2026, driven by massive capital spending on artificial intelligence infrastructure. The S&P 500 has climbed 12% year-to-date, while the Nasdaq Composite and Dow Jones Industrial Average have gained 13% and 9%, respectively.

However, with the Federal Reserve's September policy meeting approaching, expectations for a rate-hike cycle are rising rapidly. Market pricing points to an overwhelming likelihood of a quarter-point rate increase at the FOMC meeting on Sept 16, which would lift the federal funds target range from 3.5%-3.75% to 3.75%-4.00%.

Stubbornly elevated inflation has been cited as the primary reason for the Fed's policy shift. Since February 2021, US inflation has run above the central bank's 2% target for 66 consecutive months. Stronger-than-expected labor data further supports the case for tightening, with US nonfarm payrolls adding 162,000 jobs in August.

Historical patterns suggest rising correction risk once a new hiking cycle begins. Over the past 25 years, the Fed has launched three tightening cycles, each followed by significant market declines. Today's extreme valuations amplify market vulnerability, with the S&P 500 Shiller CAPE ratio standing near 40.5.