Nasdaq and S&P 500 Rally: AI Buzz Overcomes Interest Rate Fears

Wall Street appears to be shaking off the initial shock of the interest rate decision.

U.S. stock futures edged higher on Friday morning, following a strong rebound in the major stock indices on Thursday. Dow futures rose slightly, while S&P 500 futures and Nasdaq 100 futures gained a bit more.

These positive figures follow a striking turnaround. On Wednesday, the market had reacted negatively to the Federal Reserve’s first interest rate hike in three years. The U.S. central bank raised rates by 0.25 percentage points and indicated that another hike might follow later this year.

On Thursday, however, sentiment shifted completely. The Dow Jones rose 316 points, the S&P 500 gained 1.1 percent, and the Nasdaq Composite jumped 1.7 percent.

The explanation lies primarily in the technology sector. Investors seem willing to look past higher interest rates, higher oil prices, and persistent inflation, as long as the AI narrative remains intact.

That’s important. For now, the market doesn’t seem to believe that one or two interest rate hikes are enough to truly break the AI investment cycle. As long as hyperscalers continue to invest in chips, data centers, energy, and cloud capacity, investors will continue to see earnings growth among the major technology companies.

Brian Levitt of Invesco told CNBC that, in his view, this cycle is unlikely to end due to a slightly higher policy interest rate or higher oil prices. According to him, the cycle will only end if something disrupts the AI trade.

For example, if a major hyperscaler scales back its investments, or if the market concludes that the massive AI investments are yielding too little return.

Still, the interest rate hike hasn’t disappeared from the picture. Several Fed officials will speak again on Friday. Investors are primarily seeking more clarity on Wednesday’s unanimous decision and the likelihood of another rate hike later this year.

The question remains whether the Fed simply wanted to demonstrate once that it takes inflation seriously, or whether this truly marks the beginning of a new tightening cycle. That distinction is crucial. The market can handle a one-time hike. A series of hikes will be more difficult to manage, especially if oil stays above $100 and long-term interest rates remain high.

Despite Thursday’s rally, the week hasn’t been convincingly positive yet. The Dow is still down about 1.5 percent this week and is on track for its third consecutive week of losses. The S&P 500 is down slightly.

Only the Nasdaq is showing a weekly gain so far. That pretty much says it all. The broader market is struggling with interest rates and oil. But as long as AI stocks continue to drive the market, Wall Street is refusing to really break down.