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A Fed hike could eventually ease long-term yields by anchoring inflation expectations.
Massive AI investment and strong earnings could support large-cap tech stocks despite higher rates.
XLK, IVV, AIQ and CHAT offer ways to capture the potential resilience of large-cap and AI stocks.
Treasury yields moved higher as investors prepared for the Federal Reserve’s two-day policy meeting, which begins Tuesday. The 30-year Treasury yield, which is particularly sensitive to inflation and geopolitical risks, rose more than 5 basis points to 5.384%. The 2-year yield climbed about 4 basis points to 4.68%.
The benchmark 10-year Treasury yield jumped to its highest level since 2007 on Tuesday as a sell-off in U.S. government debt intensified, as quoted on CNBC.
Markets are increasingly expecting a 25-basis-point rate hike, with the CME FedWatch tool showing a more than 92% probability. August inflation remained well above the Fed’s 2% target, adding to expectations of tighter monetary policy.
Oil Prices Add to Inflation Concerns
Rising crude prices are creating another challenge for the bond market. Higher energy costs can push inflation expectations higher, putting additional pressure on Treasury yields.
Jonathan Liang, Standard Chartered’s CIO of fixed income and FX, said the 10-year Treasury remains highly sensitive to inflation expectations, suggesting that the relationship could stay strong while inflation remains above target, as mentioned in the same CNBC article.
Steve Sosnick, chief strategist at Interactive Brokers, noted that sustained strength in crude could continue pushing interest rates higher, per the above-mentioned CNBC source.
Large-Cap ETFs to Stay Strong?
Citi Research’s Scott Chronert believes that a pre-emptive Fed rate hike could help contain inflation expectations, anchor longer-term yields and reduce uncertainty in financial markets, as mentioned in a CNBC source.
While a 50-basis-point hike could potentially deliver a “bullish shock,” Chronert is not advocating such a move. He also sees AI as an important support for large-cap stocks, although higher borrowing costs are negative for corporate returns.
Investors should note that a Fed rate hike may cause long-term interest rates to fall if the Fed move successfully lowers long-term market inflation expectations. If that happens, the stock market will receive a tailwind from the Fed rate hike, as a company's borrowing costs depend heavily on long-term rates.
Tech Stocks a New Safe Haven on Massive AI Investments
Global investment in AI infrastructure is likely to hit $31.6 trillion through 2050, per PWC. Annual data center capital expenditure is forecast to rise from roughly $800 billion per year in 2026 to $1.8 trillion per year in 2050, noted PWC. The United States, which is central to the advanced-chip ecosystem, is likely to account for almost half (48%) of this investment, at $15.1 trillion.
Goldman Sachs Research estimates that global AI-related investment could reach $1 trillion in 2026, after broadening its measure of hyperscaler capital spending. Of this, about $581 billion is expected in the United States.
Note that during periods of turbulence, certain technology giants can serve as relative safe havens.The artificial intelligence trade continues to benefit from a strong structural tailwind.Hyperscalers are expected to boost investment massively.
In short, large-cap tech stocks are high-growth defensive plays, thanks to the huge and steady demand for AI and digital transformation. State Street Technology Select Sector SPDR ETF (XLK - Free Report) should stay resilient despite some short-term bumps (read: Are Tech ETFs New Safe Haven Amid Iran War?).
S&P 500 to Hit 8,000-Mark?
Jonathan Shugar of Goldman Sachs expects some short-term “speed bumps” in the S&P 500 but believes the index could rise above 8,000 by the year-end or next year, provided earnings and AI investment remain strong.
Note that S&P 500 profits have expanded for 12 straight quarters, showing powerful momentum that reaches far beyond Big Tech. 2026 Q3 earnings for the S&P 500 index are expected to increase by 23% year over year on 11.2% higher revenues. This would follow the unusually strong showing in 2026 Q2. This puts the focus on ETFs like iShares Core S&P 500 ETF (IVV - Free Report) .
Don't Fear Higher Rates: Play AI ETFs as IPO Race Heats Up
Mega IPOs are currently setting the tone of Wall Street. SpaceX (SPCX - Free Report) made a blockbuster debut in June. SpaceX's landmark offering could serve as a key indicator of market appetite for large-scale AI and technology listings.
Anthropic, OpenAI and Perplexity represent three of the most valuable private AI companies in the world, each pursuing a different path to the public markets. Anthropic currently leads the IPO race, OpenAI is close behind, and Perplexity probably remains focused on a 2028 debut.
Strong earnings growth, reasonable valuations and continued AI investment are tailwinds for the stock market. The likely Fed rate hike — intended to contain inflation — may give sweet surprises for the stock market.
View the Zacks #1 Rank List
Image: Bigstock
Fed Hike or Not: Large-Cap ETFs to Stay Strong
Key Takeaways
Treasury yields moved higher as investors prepared for the Federal Reserve’s two-day policy meeting, which begins Tuesday. The 30-year Treasury yield, which is particularly sensitive to inflation and geopolitical risks, rose more than 5 basis points to 5.384%. The 2-year yield climbed about 4 basis points to 4.68%.
The benchmark 10-year Treasury yield jumped to its highest level since 2007 on Tuesday as a sell-off in U.S. government debt intensified, as quoted on CNBC.
Markets are increasingly expecting a 25-basis-point rate hike, with the CME FedWatch tool showing a more than 92% probability. August inflation remained well above the Fed’s 2% target, adding to expectations of tighter monetary policy.
Oil Prices Add to Inflation Concerns
Rising crude prices are creating another challenge for the bond market. Higher energy costs can push inflation expectations higher, putting additional pressure on Treasury yields.
Jonathan Liang, Standard Chartered’s CIO of fixed income and FX, said the 10-year Treasury remains highly sensitive to inflation expectations, suggesting that the relationship could stay strong while inflation remains above target, as mentioned in the same CNBC article.
Steve Sosnick, chief strategist at Interactive Brokers, noted that sustained strength in crude could continue pushing interest rates higher, per the above-mentioned CNBC source.
Large-Cap ETFs to Stay Strong?
Citi Research’s Scott Chronert believes that a pre-emptive Fed rate hike could help contain inflation expectations, anchor longer-term yields and reduce uncertainty in financial markets, as mentioned in a CNBC source.
While a 50-basis-point hike could potentially deliver a “bullish shock,” Chronert is not advocating such a move. He also sees AI as an important support for large-cap stocks, although higher borrowing costs are negative for corporate returns.
Investors should note that a Fed rate hike may cause long-term interest rates to fall if the Fed move successfully lowers long-term market inflation expectations. If that happens, the stock market will receive a tailwind from the Fed rate hike, as a company's borrowing costs depend heavily on long-term rates.
Tech Stocks a New Safe Haven on Massive AI Investments
Global investment in AI infrastructure is likely to hit $31.6 trillion through 2050, per PWC. Annual data center capital expenditure is forecast to rise from roughly $800 billion per year in 2026 to $1.8 trillion per year in 2050, noted PWC. The United States, which is central to the advanced-chip ecosystem, is likely to account for almost half (48%) of this investment, at $15.1 trillion.
Goldman Sachs Research estimates that global AI-related investment could reach $1 trillion in 2026, after broadening its measure of hyperscaler capital spending. Of this, about $581 billion is expected in the United States.
Note that during periods of turbulence, certain technology giants can serve as relative safe havens.The artificial intelligence trade continues to benefit from a strong structural tailwind.Hyperscalers are expected to boost investment massively.
In short, large-cap tech stocks are high-growth defensive plays, thanks to the huge and steady demand for AI and digital transformation. State Street Technology Select Sector SPDR ETF (XLK - Free Report) should stay resilient despite some short-term bumps (read: Are Tech ETFs New Safe Haven Amid Iran War?).
S&P 500 to Hit 8,000-Mark?
Jonathan Shugar of Goldman Sachs expects some short-term “speed bumps” in the S&P 500 but believes the index could rise above 8,000 by the year-end or next year, provided earnings and AI investment remain strong.
Note that S&P 500 profits have expanded for 12 straight quarters, showing powerful momentum that reaches far beyond Big Tech. 2026 Q3 earnings for the S&P 500 index are expected to increase by 23% year over year on 11.2% higher revenues. This would follow the unusually strong showing in 2026 Q2. This puts the focus on ETFs like iShares Core S&P 500 ETF (IVV - Free Report) .
Don't Fear Higher Rates: Play AI ETFs as IPO Race Heats Up
Mega IPOs are currently setting the tone of Wall Street. SpaceX (SPCX - Free Report) made a blockbuster debut in June. SpaceX's landmark offering could serve as a key indicator of market appetite for large-scale AI and technology listings.
Anthropic, OpenAI and Perplexity represent three of the most valuable private AI companies in the world, each pursuing a different path to the public markets. Anthropic currently leads the IPO race, OpenAI is close behind, and Perplexity probably remains focused on a 2028 debut.
Global X Artificial Intelligence & Technology ETF (AIQ - Free Report) and Roundhill Generative AI & Technology ETF (CHAT - Free Report) could eventually gain exposure to newly public AI leaders (read: Don't Fear Higher Rates: Play AI ETFs as IPO Race Heats Up).
Bottom Line
Strong earnings growth, reasonable valuations and continued AI investment are tailwinds for the stock market. The likely Fed rate hike — intended to contain inflation — may give sweet surprises for the stock market.