The Fed raised rates yesterday, and I’m still constructive on the equity market. A quarter-point hike matters, but I don’t think one move on its own tells us that the bull market is over.
The context matters a lot here. We have inflation that the Fed wants to bring down, but we also have an economy that is still growing and substantial investment going into AI. Those things are happening at the same time.
I’m more concerned about a sustained tightening cycle than I am about this particular decision. If rates keep moving higher and that starts to weaken earnings and investment, then we have a different situation.
Look at the economy the Fed is responding to
The September 16 decision took the policy-rate range to 3.75%–4%. In its statement, the Fed described an economy growing at a solid pace, resilient spending, strong productivity growth and robust capital investment. It also said inflation remained elevated.
That last part explains the hike. But the other parts are important too. The Fed is describing an economy that has enough strength for it to keep focusing on inflation.
If you only look at the word “hike,” you miss that. The environment in which a decision happens matters as much as the decision itself.
The same is true in the other direction. A rate cut can be helpful, but if the Fed is cutting because the economy is weakening badly, that isn’t automatically a positive development for the stock market. Businesses still need customers, revenue and earnings.
In this case, my view is that AI investment is giving the economy a lot of support. The spending moves through construction, equipment and services, and the capacity being built creates opportunities for businesses to become more productive.
That doesn’t make the economy immune to higher rates. It does mean there’s a substantial source of demand that has to be considered alongside them.
The pace and duration matter
I see this move more as an attempt to get on top of inflation while growth is holding up. Whether that remains a reasonable interpretation depends on what comes next.
One quarter-point increase is very different from a series of increases that keeps making money more expensive. If the Fed hikes meeting after meeting, at some point the market is going to ask whether we’re in a new tightening cycle.
That would concern me. Higher financing costs can eventually change what businesses are willing to build, what consumers are able to spend and what investors are willing to pay for earnings.
Energy is another part of this I’m paying attention to. If oil stays expensive for long enough, the pressure can spread through transport and other business costs. That makes the inflation problem harder to deal with and could keep the Fed moving in the same direction.
But I don’t think it makes sense to assume the worst version of that outcome after one meeting. I want to see the next inflation reports, the direction of borrowing costs and whether businesses keep delivering on earnings.
The earnings picture is especially important. If that remains strong and investment continues, the market has something to support it even with a less comfortable interest-rate backdrop. If those start weakening together, I would have more reason to be concerned.
For now, I’m not overly worried about this hike on its own. I think the economy and the earnings backdrop can support a constructive view. The thing that would change that is a longer period of tightening that starts doing real damage to growth. That’s what I’ll be watching.
