Fed Rate Hike Imminent, But AI Boom May Sustain Bull Market

The U.S. Federal Reserve is set to raise interest rates this week, but some Wall Street firms believe that the AI investment boom could sustain the bull market.

According to Goldman Sachs' report, seven tightening cycles over the past several decades have shown that three months after the Fed begins hiking, the S&P 500 has delivered an average return of negative 2%, with only a 29% probability of positive returns. However, extending the horizon to 12 months, the average return climbs to 9%, with every cycle except 2022 producing positive results.

The AI investment boom is driving robust corporate earnings growth, with hyperscale cloud providers continuing to pour substantial capital into AI development. This is expected to sustain double-digit earnings growth in 2027, which should be sufficient to offset any dampening of optimism from rate hikes.

The pace and magnitude of hikes will also determine market resilience, with historically slow tightening cycles leading to average gains of 10.5% over the following year, while rapid hikes have led to average declines of 3.6%. Goldman Sachs' rates strategy team attributes the recent rise in long-dated yields to higher oil prices, a repricing of the Fed's rate path, sustained strong economic growth, and the AI investment boom.