Written by Steve Andrews
A Birthday Celebration for the Bull Market
This month marks the fourth anniversary of the start of the current bull market for U.S. stocks. Back in October 2022, the Federal Reserve was more than halfway through its dramatic rate-hiking cycle, which lifted the federal funds rate from near 0% at the start of 2022 to 5.33% in just 18 months as policymakers sought to combat inflation, which pushed the Consumer Price Index (CPI) above 9%. Markets were not enthusiastic about the rapid increase in rates. Stocks and bonds experienced significant volatility throughout the tightening cycle. However, by the time rate hikes concluded in early 2023, the S&P 500 had gained nearly 4.2% from its January 2022 level.
Although the rate-hiking cycle ended, investors soon faced a new series of challenges. Concerns ranged from the wars in Ukraine and Gaza to the collapse of Silicon Valley Bank and broader regional banking stress. Additional worries included tariffs, questions surrounding artificial intelligence, geopolitical tensions involving Iran, rising energy prices, and more recently, higher long-term interest rates. Any one of these developments had the potential to derail economic growth. Yet despite this steady stream of concerns, U.S. stocks remain near record highs as of mid-October.
What's Driving Interest Rates Higher?
The yield on the 10-year Treasury recently reached 5.33%, its highest level in decades. Despite persistent financial headlines portraying higher borrowing costs as a fatal drag on economic growth, they have not derailed the economy.
As discussed last month, interest rates have largely returned to historically normal levels. Historically, rates tend to become problematic when they rise above nominal GDP growth, which combines real economic growth and inflation. In the second quarter, U.S. nominal GDP expanded at a 6.3% annualized rate.
Because 10-year Treasury yields remain below nominal GDP growth, borrowing costs continue to be absorbed by expanding corporate revenues. Rather than retreating in response to yields above 5%, businesses are continuing to invest and expand. ISM Manufacturing order backlogs reached a seven-month high of 56.4 in September, while ISM Services backlogs climbed to a four-year high of 56.6. To meet growing demand, companies have increased investment activity, issuing more than $3 trillion in investment-grade corporate bonds during the 12 months through August. Combined with more than $2 trillion in additional federal borrowing during the same period, this surge in debt issuance helps explain upward pressure on interest rates.
With approximately $34 trillion in federal debt outstanding, the 10-year Treasury yield has returned to levels last seen in 2007, when federal debt stood at roughly $8 trillion.
Other Factors
Global developments are also influencing U.S. interest rates. Fiscal instability and liquidity shifts abroad have contributed to rising yields worldwide.
Long-term interest rates in France have risen amid growing budget deficits, leading some analysts to warn that the country's fiscal position is becoming increasingly challenging. Combined with ongoing concerns about European energy prices, these developments have contributed to shifts in global capital flows that affect U.S. bond markets.
Additional upward pressure on interest rates comes from the unwinding of Japan's long-standing carry trade. For more than two decades, investors borrowed at extremely low rates in Japan and invested in higher-yielding assets elsewhere, including U.S. Treasuries. As the Bank of Japan gradually raises rates, that interest-rate advantage narrows, encouraging investors to unwind those positions. Selling pressure on Treasuries lowers bond prices and pushes yields higher.
Current yields have also restored a positive term premium to the bond market. With inflation running at 3.4%, a 5.24% 10-year Treasury yield provides investors with a positive real return. This level is closer to historical norms following the unusually low-rate environment that prevailed after the 2008 financial crisis.
Higher yields also benefit savers, retirees, and other income-oriented investors. These groups have seen meaningful increases in interest income, helping support consumer spending alongside record levels of household net worth.
What's Driving the Resilient Economy?
Contrary to claims that the recent economic expansion is driven primarily by speculative enthusiasm surrounding technology stocks, economic data suggest that artificial intelligence is increasingly fueling substantial investment in physical infrastructure and capital spending.
A recent Brookings Institution study projects that AI-related spending could exceed $10 trillion over the next six years and contribute significantly to U.S. economic growth. Much of that investment is being directed toward physical infrastructure.
Through July, spending on data centers increased by $9 billion year over year, reaching $37 billion. In August alone, data-center construction rose 7.5% from the prior month and stood 73% above August 2025 levels.
At the same time, U.S. imports of AI-related equipment, including semiconductors, computers, and telecommunications hardware, increased by $273 billion during the first eight months of 2026 compared with the same period in 2025. Supported in part by record levels of corporate bond issuance, investment in AI infrastructure is providing a meaningful boost to manufacturing, engineering, and construction activity.
Economic Fundamentals Remain Solid
The AI investment cycle is providing an additional tailwind to an economy that remains fundamentally resilient. Consumer spending continues to support GDP growth, aided by steady gains in employment and wages.
September's headline increase of 29,000 non-farm payroll jobs appeared modest. However, the Household Survey, which captures employment trends among smaller businesses and startups and serves as the basis for the unemployment rate, showed a gain of 406,000 jobs during the month and 1.1 million over the previous two months.
Because the labor force expanded by 485,000 workers, the unemployment rate edged up slightly from 4.1% to 4.2%.
Data from the Job Openings and Labor Turnover Survey (JOLTS) and weekly unemployment claims continue to indicate that layoffs remain historically low. Job openings still exceed the number of unemployed workers, with approximately 1.1 openings available for every unemployed American. A meaningful portion of recent employment growth has come from young men ages 18 to 24, a demographic that had previously lagged overall payroll growth. Meanwhile, total private-sector wage income, which combines hours worked and hourly earnings, rose 4.7%, outpacing inflation and supporting household purchasing power.
Navigating the Fourth Quarter
The U.S. economy continues to defy many bearish forecasts. Consumer spending remains strong, supported by healthy household balance sheets, rising wages, and substantial accumulated wealth. Corporate profitability reflects this underlying strength. Wall Street analysts project third-quarter earnings-per-share growth for the S&P 500 of nearly 30%, potentially marking a sixth consecutive quarter of record earnings.
As the economy navigates higher, more normalized interest rates while simultaneously undertaking a significant AI-driven investment cycle, it has continued to overcome the many concerns facing investors. Thus far, both the economy and the stock market have demonstrated remarkable resilience. Let's hope that trend continues.
