Why Major Stock Indices Don't Care About Rates — 2026-10-06
Core thesis: Major indices (SPX, NDX) are rallying to all-time highs despite decades-high interest rates because AI infrastructure beneficiaries—semiconductor makers, cloud vendors, data center builders—are capturing huge profits and remain insensitive to rate rises when projected returns on AI investments far exceed borrowing costs.
Key points:
- SPX and NDX are increasingly top-heavy and concentrated in large-cap tech; Q3 and September saw large-cap tech outperform, making indices even more concentrated and benefiting those holding these proxies.
- Rising global rates reflect both structural factors (deficits, commodity prices) and marginal demand for funding driven by AI buildout—the price of money rises at the margin.
- Companies with double-digit (or higher) expected returns on AI projects remain indifferent to 50 bps to several percentage point increases in borrowing costs; the investment hurdle rate far exceeds the cost of capital.
- Traders are treating rate moves as a "ratchet effect": indices rally when yields tick lower and ignore rate rises—a dynamic likely to persist until Q3 earnings guidance arrives later this month.
- Profitability remains elusive for AI leaders (Anthropic, OpenAI—not yet public), while public infrastructure players capture the gains.
Takeaway: Short-term, expect stocks to shrug off rising rates and rally on any yield declines. This inertia will likely break once companies issue forward guidance; monitor earnings season for a potential shift in rate sensitivity.