Why the Stock Market Keeps Surging Despite Rising Rates, High Oil and A.I. Spending Fears

Investors in the stock market are navigating a difficult backdrop that includes a prolonged conflict in Iran, rising oil prices and a sell-off in government bonds that threatens to push borrowing costs higher across the economy. Despite all of this, they remain remarkably calm. The S&P 500 has climbed nearly 13 percent this year, and many analysts still believe the market could finish even stronger by year’s end.

A major reason for this optimism is a strong corporate earnings season combined with continued enthusiasm for artificial intelligence. These forces have helped investors look past concerns about inflation and the impact of higher interest rates. Still, the rally may face challenges as the market moves into September, a month that has historically been difficult for stocks. Rising interest rates and growing worries about the enormous spending required for A.I. data centers also pose risks.

The excitement around A.I. has been a powerful driver of the market for more than a year, and it continues to deliver. Exceptional financial results from major tech companies like Nvidia have pushed stocks higher by showing that demand for A.I. remains strong. Investors have become more selective, paying close attention to how much large technology companies—often called hyperscalers—are spending on A.I. infrastructure. Even so, many still believe that the heavy investment in computing power will eventually pay off. The Nasdaq, which is heavily weighted toward technology companies, is up about 14 percent this year.

Market optimism extends beyond A.I. Corporate earnings across many industries have exceeded expectations, often by a wide margin. By the end of August, roughly 88 percent of S&P 500 companies that had reported quarterly results beat forecasts for earnings per share. Even those that fell short generally missed by only small amounts. Because the S&P 500 is weighted by market value, its performance is heavily influenced by a handful of large technology companies. But even when each company is given equal weight, the index has performed well. The equal‑weighted S&P 500 is up more than 13 percent this year, slightly outperforming the standard version.

Several factors explain this broad strength. High oil prices have boosted profits for energy companies. There has also been a lift from tariff refunds. After the U.S. Supreme Court struck down a series of tariffs on imported goods in February, the Trump administration was required to return tens of billions of dollars to American companies. These refunds provided a major boost in the second quarter. Kohl’s received about $100 million, and companies like Lowe’s and Smucker’s also benefited significantly.

A.I. has played a role in lifting earnings as well. Many companies are beginning to integrate A.I. into their operations, expanding the impact beyond the largest tech firms. Analysts at Barclays estimated that nearly half of all companies discussed A.I. in meaningful detail during their second‑quarter earnings calls, and about 30 percent talked about it in ways directly tied to revenue, cost savings or efficiency improvements.

Even with all this momentum, rising interest rates could threaten the rally. Rates on government bonds have been climbing, and if they continue to rise, they could weigh on stocks. Higher‑yielding bonds offer attractive returns with less risk, which can make stocks look less appealing. This is especially true for companies whose profits are expected to grow far into the future. As bond yields rise, borrowing becomes more expensive for companies that rely on debt to expand.

Right now, the 10‑year Treasury note sits at 4.78 percent. Some analysts warn that a sustained move above 5 percent could begin to pressure corporate earnings and weaken the stock market. Investors have also become more sensitive to anything that disrupts the A.I. narrative. When Google reported strong earnings in July, its stock still dipped because its spending forecast was higher than expected.

Higher Treasury yields add another layer of concern. The government is raising rates to attract buyers for its debt despite large federal deficits. But this could force A.I. companies to offer higher rates on their own bonds to keep investors interested, making it more expensive for them to finance growth. Some analysts warn that if deficits remain high, government borrowing could crowd out corporate borrowing, limiting investment in A.I. altogether.

Other challenges lie ahead. The benefits from tariff refunds will fade, leaving some companies—especially those dependent on consumer spending—facing a more uncertain environment. Walmart and Kohl’s have noted that their customers are feeling the strain of higher gas prices, though both companies still raised their earnings outlooks for the rest of the year.