Key facts
- Investors are watching the Federal Reserve's future rate path and Middle East tensions.
- The Fed hiked interest rates for the first time in three years to combat inflation.
- Uncertainty remains about the number of future rate hikes by the US central bank.
- Rising Treasury yields and oil prices have impacted stock performance.
- Tech stocks, a major component of the S&P 500, are being watched amid AI development concerns.
- Industry leaders have called for a slowdown in AI development due to potential dangers.
US stock investors are set to focus on the trajectory of interest rates, tensions in the Middle East, and calls for a slowdown in AI advancement in the coming week, as they assess the potential for equity indexes to reach new all-time highs. The Federal Reserve recently implemented its first interest rate hike in three years in an effort to curb inflation, a move that has left investors uncertain about the central bank's future hiking path and the implications for rising Treasury yields.
Recent market movements have been influenced by increasing Treasury yields and surging oil prices amid the escalating conflict in the Middle East. Art Hogan, chief market strategist at B. Riley Wealth, noted that levels of 5% for the benchmark 10-year Treasury yield and $100 a barrel for oil act as "psychological lines in the sand." When these levels are breached, market participants find the headwinds "insurmountable," he said.
Stocks saw gains on Thursday as oil prices and yields declined, with US crude falling to $101 a barrel and the 10-year yield dropping to 4.93% late in the session. This rise left the S&P 500 up over 11% for the year and approximately 2% below its mid-August record high.
The rate hike, which could increase borrowing costs and slow the economy, was largely priced into markets beforehand. The decision was also viewed as a test of credibility for new Fed Chair Kevin Warsh, particularly regarding the central bank's willingness to raise rates despite President Donald Trump's repeated calls for rate cuts. Joe Mazzola, head trading strategist at Charles Schwab, stated that "We got through a significant hurdle" with the meeting.
Investors are now awaiting further signals on when the Fed might implement another rate hike. Fed funds futures indicated roughly even odds of a hike at the October meeting, which precedes the US midterm elections. With Fed policymakers expected to speak next week, any insights into the central bank's plans for the current hiking cycle will be valuable, especially given Warsh's stated preference to avoid forward guidance. "With lack of guidance, which really is the new normal here with Chair Warsh, I think it becomes more important to pick the brains of the folks that are willing to speak," Hogan said.
Economic data releases next week, including surveys on manufacturing and services activity and consumer sentiment, may provide further information on inflation trends. Investors are also monitoring the anticipated visit of Chinese President Xi Jinping to the US, including a meeting with President Trump on Thursday. Discussions between the two countries are expected to touch upon the AI development race and semiconductor restrictions, which could impact technology shares. The tech sector, which constitutes 38% of the S&P 500, has gained over 20% in 2026 but has seen a decline since early June. "Tech needs to get back in that pole position for us to see those new all-time highs," Mazzola commented.
Concerns about AI development have also surfaced following industry leaders' calls for a slowdown due to dire warnings about the technology's dangers, which have modestly weighed on semiconductor companies. However, investors are looking for more concrete signs, such as potential regulatory moves, before declaring trouble for the AI spending theme. Jeff Schulze, head investment strategist at the Franklin Templeton Institute, believes that "I doubt that regulation is going to come that really curtails the investment and the pace of the model development going forward," suggesting that any stock weakness could present a buying opportunity. Schulze added that the S&P 500's stability over recent months, despite strong corporate earnings, provides a "good valuation base for the market to melt higher" and creates "a pretty positive setup for risk assets, especially if we can continue to get some drop of long bond yields."