What’s Next for Stocks After the Fed Rate Hike

Key Takeaways

• With a Federal Reserve rate hike in the rearview mirror, analysts are looking for healthy corporate earnings to act as a tailwind for the stock market through the end of this year.
• The market outlook is complicated by elevated oil prices, which threaten to feed inflation and potentially lead to more rate hikes.
• Investors are also concerned about a potential pullback in artificial intelligence infrastructure spending, analysts say.

After months of buildup, the Federal Reserve’s first interest rate increase in three years is finally history, and the stock market largely coasted through it. The focus now returns squarely to the factors that helped the stock market recover from a spring swoon to post double-digit returns: a strong economy and powerful gains in corporate earnings.

The Morningstar US Total Market Index has risen 12.6% in 2026 through Thursday, with a roughly 15% gain from a year ago. The market is holding about 3% below its most recent all-time high set in August.

“We believe the bull market remains intact,” wrote David Lefkowitz, head of US equities at UBS Global Wealth Management, on Thursday.

At the same time, evolving conflict in the Middle East, restricted oil supply, and upward pressure on energy costs are a headwind for both the stock market and the global economy. “The market’s contending with a lot,” says Gina Martin Adams, chief investment strategist at HB Wealth.

Analysts say continued earnings momentum should help stocks overcome remaining uncertainty around inflation, interest rates, and the potential for any slowdown in AI spending in the months ahead, should safety concerns build.

Strong Earnings Seen as Continued Bull-Market Fuel

So far, the economy’s resilience and massive AI investments have driven strong earnings growth. Excluding one-time nonoperating gains, the S&P 500 grew earnings 32% in the second quarter, “its strongest pace since the postpandemic rebound in 2021,” according to Wells Fargo. Analysts predict earnings momentum will persist through year-end. Wall Street analysts expect the S&P 500 to grow aggregate earnings by 28.7% in the current quarter, its third consecutive quarter of growth above 25%, according to FactSet. Over the past five years, the index’s quarterly earnings growth averaged 16.4%.

“Generally, as long as earnings are still rising—and especially if they’re still accelerating in most sectors—the market should be relatively stable, if not continue to rise,” says Martin Adams.

Oil Prices Continue to Be a Thorn in the Market’s and Fed’s Side

With the Iran war approaching the seven-month mark, its spreading impact on oil supplies remains a concern. Oil prices have rebounded from their midsummer lows, with Brent crude, the global benchmark, trading at $105 a barrel on Friday as the stalemate in the Strait of Hormuz ground on and Iranian allies in Yemen disrupted Saudi Arabia’s alternative routes in the Red Sea. Rising oil prices have pushed up gas, diesel, and other fuel costs, keeping inflation elevated and likely playing a factor in the Fed’s quarter-point interest rate hike.

High oil prices and the inflationary pressures they create will be a stock market headwind if they persist, Martin Adams says. “We’ve got to get oil back to $100 a barrel.” She emphasized the issues of the rising cost of diesel, which, as the trucking industry’s primary fuel, can ripple through supply chains and bleed into nonenergy prices.

“The fact that diesel is above $6 is particularly problematic, and that’s making the market very nervous,” she added.

Rising Prices Could Put a Damper on Stocks

In raising interest rates, the Fed pointed to “elevated” inflation pressures. Inflation has been running above the Fed’s 2% target rate for five years, and while many economists expect upward price pressures to ease, the bond futures market on Thursday puts the odds of one more rate hike this year at about 50% and the odds of two more hikes at nearly 40%, according to data from CME Group.

“Inflation expectations have been pretty under control,” says Morningstar’s Chief US Market Strategist David Sekera. If that changes, he says, “then you also have real rates rising. You could see a 6% [10-year Treasury yield] if people start baking in higher expected inflation.” Rising yields would be expected to draw more institutional capital to fixed income from equity, “but the big concern for me is if you have higher rates of return required for equities. That really is what could cause the equity market to turn down,” he said.

So far, despite a slew of headwinds, the US economy has absorbed shocks surprisingly well. The August jobs report showed the unemployment rate held steady at historically low levels at the end of a stronger-than-expected summer for the labor market. This week’s August retail sales data suggested consumers are absorbing price increases and continuing to spend on discretionary goods.

The AI Trade Faces Fresh Concerns

The strength of AI infrastructure spending is another factor driving equity markets in the near term. Goldman Sachs estimates global investment in artificial intelligence will top $1 trillion this year, a level of spending that has fueled rapid growth for the industry’s pick-and-shovel makers. Goldman last month predicted AI investment as a share of US gross domestic product will increase from 1.8% in 2026 to 2.5% next year and 2.8% in 2028.

Bullish AI investment forecasts were called into question this week after prominent AI leaders, including SpaceX’s SPCX Elon Musk, OpenAI’s Sam Altman, and Anthropic’s Dario Amodei, expressed support for a slowdown of AI development in light of mounting safety concerns. More cautious development “could mean a longer but slower growth cycle for the beneficiaries,” said Martin Adams, who expects uncertainty about future AI spending to linger until hyperscalers Alphabet GOOG/GOOGL, Microsoft MSFT, and Amazon AMZN report third-quarter earnings in late October.

But Martin Adams says the AI trade may not be at sea quite that long. “If we get an Anthropic IPO [before earnings season], we will get a lot of detailed financial statements that allow investors to consider the profitability of AI from a model-developer standpoint, which I think could offer some solace to a market that’s currently nervous about [AI safety],” said Martin Adams.

Morningstar’s Sekera expects the market will wait longer for the clarity needed to revive positive sentiment on mega-caps like Nvidia NVDA, Broadcom AVGO, and the hyperscalers that Morningstar analysts see as undervalued. “We’re going to have to get the market to buy off on 2028 growth,” he said. “That probably doesn’t happen until the first quarter of next year—maybe not even until the second quarter—as those companies are planning out their 2028 capex and production runs.”