Why US stocks hit record highs even as the Fed hikes again

Krisada Yoonaisil

Financial market strategist

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Why are US stocks near record highs even as the Fed raises rates? Past hiking cycles, the AI investment boom, and earnings growth explain the paradox.

Financial markets look strikingly contradictory right now. Several central banks have turned hawkish at the same time—the ECB, the RBA, and the Fed all raised rates in September—and markets have priced in around an 88% chance of another Fed rate hike by December. Meanwhile, the 10-year US Treasury yield has climbed above 5%. Yet the S&P 500 record high persists, and the Nasdaq-100 recently hit an all-time high.

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Key takeaways

Stocks have historically risen through Fed hiking cycles. In each of the last four cycles, the S&P 500 ended higher than where it started, despite volatile paths along the way.
This cycle’s inflation isn’t demand-driven. Rate hikes are responding to cost-push inflation from geopolitical oil disruptions, not overheating consumer demand.
AI investment is decoupling growth from the usual playbook. Sustained AI-related capex is lifting orders, revenue, and cash flows across the supply chain, even as rates climb.
New technology S-curves could be the key driver. Markets are betting that AI, big data and future technologies like quantum computing can generate enough cash flow to offset higher funding costs.
The outcome hinges on productivity, not sentiment. Whether this S&P 500 record high holds depends on whether AI-driven earnings growth can actually outpace the rising cost of capital.

Why do stocks historically survive Fed hiking cycles?

Higher bond yields should pull money out of equities and rotate into fixed income, a classic rotation effect in theory—a dynamic we explored further in our article on why the US dollar could reclaim its king status. So why are stocks still pushing higher? So why does the S&P 500 record high keep holding even as the Fed rate hike stock market dynamic plays out? The answer is that the direction of risk assets depends not on whether rates are rising, but on three questions: 1. Why are rates rising? 2. How fast are they rising? 3. Are corporate earnings growing faster than the cost of capital?

S&P 500 returns during Fed hiking cycles

S&P 500 record high: log-scale chart showing S&P 500 price action against the Fed funds rate across the last four Fed rate hike cycles

S&P 500 record high history: in each of the last four Fed rate hike cycles, the index ended higher than where it started, though the path was often volatile.

Chart: S&P 500 (log scale, top) vs Fed funds rate (bottom), with the last four rate-hiking cycles shaded

Fed rate hike stock market: chart comparing S&P 500 performance from the start to the end of each of the last four Fed hiking cycles

Fed rate hike stock market pattern: across the last four hiking cycles, stocks ended higher from first hike to last, though each cycle’s path to a new high was often extremely volatile.

Summary:

Markets have a strong historical precedent for shrugging off a Fed rate hike-fueled stock market environment—the current S&P 500 record high fits a pattern seen in each of the last four hiking cycles, even though the path to it was rarely smooth.

Why isn’t this inflation cycle hurting stocks the usual way?

In basic economics, interest rates are a central bank’s main tool for fighting inflation, as the left-hand side of the diagram below shows:

Fed rate hike stock market diagram: comparing the classic demand-pull rate hike cycle that ends in falling stocks against the current cycle’s AI growth channel versus oil-driven cost channel

Fed rate hike stock market mechanics: the classic demand-pull cycle ends in falling stocks, but this cycle balances AI-driven growth against energy and funding cost pressures.

This type of inflation is known as demand-pull inflation, and rate hikes aimed at cooling demand tend to weigh on stocks as well.

This time, however, overheating demand isn’t the main driver behind the current Fed rate hike stock market cycle. Instead, the hikes reflect inflation that has accelerated as geopolitical tensions disrupt oil supplies. This energy-driven inflation is a form of cost-push inflation (right-hand side of the diagram). At the same time, AI investment in hardware and software continues to drive demand for goods and services across the supply chain. In this cycle, inflation and growth come from different sources and are not directly linked (middle diagram).

Therefore, central banks may need to stay tight, or hike further, if inflation proves persistent and broad-based amid strong investment. The goal is to curb pass-through and preserve confidence in price stability while weighing the cost to growth.

For equities, sustained investment may lift orders, revenue, and expected cash flows, so some sectors can keep pushing toward a fresh S&P 500 record high even as rates climb—although, as we covered in which assets benefit from rising yields, a move toward 5% can still become a major market risk. But the gains from growth must outweigh higher energy and funding costs, plus the valuation drag from higher discount rates. If profits get squeezed or projects underdeliver, the picture could change.

Summary:

Unlike past cycles driven by overheating demand, this Fed rate hike stock market environment is driven by cost-push energy inflation alongside an AI investment boom. This combination explains why the S&P 500 record high isn’t reacting the way textbook theory would predict.

Can new technology S-curves keep driving stocks higher?

New technologies tend to follow an S-shaped curve: adoption starts slowly, accelerates sharply, then levels off as the technology matures. The economy now appears to be in a similar transition, as new engines such as AI, big data, data centers and, further out, quantum technology keep growth going—a theme we explored further in our broader 2026 stock market outlook. That is why some stocks can still rise: markets expect these new engines to generate enough cash flow to offset higher funding costs. However, these valuations still have to pass the tests of productivity, real-world demand, and return on investment. If businesses deliver, growth could keep the Fed rate hike stock market story intact, allowing stocks to rise alongside bond yields.

The key question is whether these technologies can deliver productivity gains that justify the massive investment. It is the million-dollar question, and only time will tell.

Summary:

The entire bull case for this S&P 500 record high rests on a bet that AI and adjacent technologies are early in their S-curve—if that bet proves wrong, the valuation gap between price and productivity could close quickly.

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Final thoughts

The paradox of an S&P 500 record high persisting through a Fed rate-hike stock market cycle isn’t really a paradox once you look past the headline. History shows equities have weathered hiking cycles before, but this time the source of inflation—cost-push, energy-driven, and decoupled from overheating demand—matters as much as the hikes themselves. AI investment is providing a genuine growth offset, but that offset only holds if productivity gains eventually catch up to the scale of capital being deployed. Until then, this record run will likely keep testing the market’s patience as much as its conviction.

Disclaimer: This article is for informational purposes only and does not constitute financial or trading advice. Always conduct your own research or consult a licensed financial advisor before making any investment decisions.